The Lost Decade of Music: Sales Halved in the 2000s

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By David Goldman, Editor

NEW YORK (CNNMoney.com) — If you were watching the Grammy Awards on Sunday night, it looks like all is well in the recording industry. But at the end of last year, the music industry was worth half what it was worth ten years ago and the decline doesn’t seem to be slowing anytime soon.

Total US music sales and licensing revenue plunged to $6.3 billion in 2009, according to Forrester Research. In 1999, this turnover exceeded 14.6 billion dollars.

Although the Recording Industry Association of America will release its official numbers in early spring, the trend is very clear: the RIAA has seen revenue decline in nine of the past 10 years, with album sales dropping an average of 8% each year. The last decade was the first in which sales were lower on exit than on entry.

“There have been a lot of changes over the past 10 years,” said Joshua Friedlander, vice president of research at the RIAA. “The industry is adapting to consumer demands for how, when and where they listen to music, and we’ve had increasing difficulty monetizing these changes.”

The decade’s two recessions certainly didn’t help music sales. It’s also a bit unfair to compare the 2000s to the 1990s because the 90s saw an abnormal increase in sales as consumers replaced their cassette tapes and vinyl records. en masse with CDs.

But industry insiders and experts say the main culprit behind the industry’s massive decline is the growing popularity of digital music.

“The digital music industry has been a war of attrition that nobody seems to be winning,” said David Goldberg, the former head of Yahoo Music. “The CD is still dying out, and there is nothing to replace it in its entirety as a revenue generator.”

The disease of the free

The battle to pay digital customers may have been lost before it really started. In 1999, Napster, a free online file sharing service, debuted. Not only did Napster help change the way most people got music, it also reduced the price from $14 for a CD to free.

“It’s pretty easy to give something away for free,” said Russell Frackman, the music industry’s lead attorney in his 1999 case against Napster. “It’s not that the music industry thought the technology was bad, they just objected to the use that was being made of it.”

Apples (AAPL, fortune 500) iTunes is credited with finally getting people to pay for digital music, but it wasn’t unveiled until 2003.

Between the closure of Napster and the debut of iTunes, many of Napster’s 60 million users found other online file sharing techniques to get music for free. Even after iTunes tricked people into buying music tracks for just 99 cents, it wasn’t as appealing as free.

“That four-year lag is where the music industry lost the battle,” said Sonal Gandhi, music analyst at Forrester Research. “They lost an opportunity to take new consumer behavior and monetize it in a way that nipped the expectation of free music in the bud.”

Today, only 44% of American Internet users and 64% of Americans who buy digital music believe that this music is worth paying for, according to Forrester. The volume of unauthorized downloads continues to represent around 90% of the market, according to online download tracker BigChampagne Media Measurement.

“People will steal music regardless, so it’s not worth trying to fight something where the fight is already over,” said Dan Ingala, founder and lead singer of Plushgun.

When Plushgun released their album “Pins and Panzers”, it was the most downloaded album on popular peer-to-peer website What.cd with over 10,000 tracks illegally downloaded.

“It’s just a matter of adjustment,” Ingala said. “At the same time, it helps us build an audience.”

Where we are going

The problem for the music industry might actually be its biggest opportunity. Despite the sharp decline in sales, the Internet has exposed consumers to more music than ever before. But this accessibility has been difficult to monetize.

The music industry has tried to keep up by licensing ringtones, music on popular Internet radio stations like MySpace Music and Pandora, and music videos on YouTube. Revenue from digital licensing reached $84 million in 2009 and is expected to grow significantly in the coming year. (See fix below.)

Licensing fees don’t make up for the full volume of lost sales, but Gandhi says the fact that the music industry is finally embracing these new technologies and revenue streams means the industry is finally getting them.

She said the combined effect of interactive media, a growth in digital licensing and services such as Lala, which was acquired by Apple in December, will ultimately help drive sales.

“The industry is actively doing a lot of things that are getting us back on track,” the RIAA’s Friedlander said. “We’re moving to an access model from a purchase model.”

Forrester predicts that music industry revenues will continue to decline until they reach approximately $5.5 billion per year by 2014, as new revenue streams begin to drive sales again.

Correction: An earlier version of the story incorrectly reported the digital licensing revenue figure as $84 billion when it should have been $84 million. To the top of the page

First published: February 2, 2010: 4:24 a.m. ET

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