Monday, June 25, 2007

Compact Disc's Outlook Worsens

Compact Disc's Outlook Worsens
Louis Hau, 06.22.07, 6:45 PM ET

The compact disc, for years the music industry's dominant format, appears to be falling out of favor with consumers faster than industry observers had predicted. Digital music? Another story.

In a report, industry analysts Richard Greenfield and Mark Smaldon of Pali Research in New York said they now expect U.S. unit sales of CDs to slide 20% in 2008, a bigger decline than the 15% drop they had previously predicted. Moreover, decline would come on the heels of an expected 18% drop in U.S. CD sales in 2007.

"We are increasingly skeptical that the rate of CD decline will slow in 2008, as CDs increasingly become less relevant to the daily lives of the core music-buying population,'' Greenfield and Smaldon said in their report.

A key factor affecting CD sales: how quickly those big-box retailers such as Best Buy (nyse: BBY - news - people ) shrink the amount of floor space they devote to music to levels more comparable to Wal-Mart (nyse: WMT - news - people ). Combined with the growing utility of digital music, it could easily lead to even more rapid decline in CDs in 2008-2010, they said, pointing out that such losses will hurt their otherwise healthier music-publishing businesses.

Meanwhile Apple (nasdaq: AAPL - news - people ) released data Friday from research firm NPD Group showing that the company's iTunes Store was the third-largest music retailer in the U.S. during the three months ended March 31.

iTunes finished the quarter with a 9.8% market share, putting it behind Wal-Mart (15.8%) and Best Buy (13.8%) but ahead of (nasdaq: AMZN - news - people ) (6.7%) and Target (nyse: TGT - news - people ) (6.6%). To compare Apple's mostly single-song download sales with the mostly physical sales at the other retailers, NPD converted single-song iTunes downloads into album units by considering every 12 downloads as an album.

Greenfield and Smaldon said they expect U.S. unit sales of digital music to grow 28% in 2008, slowing from projected growth of 47% this year. However, rapid growth in digital sales will still fall short of making up for the decline in CD sales.

As a result, the Pali analysts expect total U.S. unit sales of recorded music to decline about 9% in both 2007 and 2008. (For their calculations, they counted every 10 digital tracks as an album.) They also reiterated their "sell" rating on Warner Music Group (nyse: WMG - news - people ), the only major record label whose shares trade publicly in the U.S.

As always, comments are welcome.


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