The 2005 numbers are in, The Hollywood Reporter notes, and it seems CD sales declined more than 10 percent from 2004, or 8 percent when a 52-week comparison is done. (Tip o' the hat to Lauren Weinstein's EEPI list.) The big unanswered question here is this -- how much has this decline been offset by online download sales? This information not being offered by the reporter, I'm going to assume that because the online market remains nascent, it doesn't close the gap described above.

I don't pretend to have the answers for the decline, any more than I can offer all the answers for Hollywood's decline in box office sales (Dan Glickman has his own perspective in today's Wall Street Journal) but it's important that these numbers not be spun improperly by those in the intellectual property debate, such as...

The commonists. This crowd compares the RIAA and its member companies to the Gestapo, so many of them will see these numbers and cheer. But they must remember that this decline in CD sales significantly hurts the retailers where the CDs are sold. A big-box retailer like Wal-Mart or Best Buy can use CDs as a loss leader to lure in other customers, but the local CD stores -- the ones most likely to stock offbeat merchandise of interest to the eclectic -- are the ones most likely hurt in a decline such as this. Would-be artists also suffer. If a label wants to increase sales in 2006, it's not going to gamble on a bunch of unknowns. It's going to look at its existing stable of artists, find the one or two who have shown the least decline in sales, and rush out a new album by them backed with massive marketing. This will not enrich the collective music experience.

Labels. It's clear that online piracy persists. This does indeed impact CD sales. But it has proven exceedingly difficult to quantify the direct impact of file sharing on CD sales. Fortunately, as Solveig is noting, many major file-sharing software makers are reforming, so we can hope going forward that whatever negative impact there has been from piracy will be somewhat less. Labels should know this about their cinematic brethren, though; a lack of movies with compelling plots, characters and writing has to have had some impact on the decline in box office sales. All of those who say there is a lack of compelling and original music in the market must represent at least a portion of the market. Music isn't a toaster and can't be packaged or sold that way; sometimes you have to ignore the MBAs and the lawyers and take a chance on an artist. That can be hard to do when sales are declining but it could pay off.

I believe a brighter future is at hand for both the music industry and consumers, but not for brick-and-mortar retailers. I was sincere in feeling for the local record stores, but they're being deluged by a creative wave of destruction, and no fellow at a digital economy think tank would advocate stopping progress to save that industry. I haven't bought a single CD since I signed up for an online subscription service, but I've spent the equivalent of a CD a month on music and I've had far more variety. My daughter, who is only ten, records the tail end of songs she hears and likes on her MP3 player's radio, then pays 99 cents to download the whole song using the song information captured by the player. I don't think it would ever cross her mind to buy a whole CD by an artist, and the format wouldn't be as convenient for her. As Edgar Bronfman Jr., described at our Aspen Summit, distributing music online frees labels from not just physical production and distribution costs but much marketing costs as well.

Labels can emulate Warner and experiment with multiple distribution methods. Online song retailers can give labels more flexibility to price songs by demand rather than arguing that the same price should be charged for the latest chart-topping Mariah Carey tune and an obscure Lightnin' Hopkins riff (I'd pay more for the latter but I suspect the market would dictate the reverse). Consumers can encourage this market innovation by purchasing songs rather than stealing them. Then, perhaps The Hollywood Reporter won't find any need to write about CD sales, because the medium is no longer important, only the music.

posted by Patrick Ross @ 7:04 PM | Free Culture Movement, Markets: Business, Investment & Innovation, Prices, Terms, and Licensing

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