Sales of Music, Long in Decline, Plunge Sharply Rise in Downloading Fails to Boost Industry

“Sales are so down and so off that, as a
manager, I look at a CD as part of the marketing of an artist, more
than as an income stream,” says Mr. Rabhan. “It’s the vehicle that
drives the tour, the merchandise, building the brand, and that’s it.
There’s no money.”
Jeff Rabhan, who manages artists and music producers including
Jermaine Dupri, Kelis and Elliott Yamin

The slide stems from the confluence of long-simmering factors that
are now feeding off each other, including the demise of specialty
music retailers like longtime music mecca Tower Records. About 800
music stores, including Tower’s 89 locations, closed in 2006 alone.

Apple Inc.’s sale of around 100 million iPods shows that music
remains a powerful force in the lives of consumers. But because of
the Internet, those consumers have more ways to obtain music now than
they did a decade ago, when walking into a store and buying it was
the only option.

Today, popular songs and albums — and countless lesser-known works
— can be easily found online, in either legal or pirated forms.
While the music industry hopes that those songs will be purchased
through legal services like Apple’s iTunes Store, consumers can often
listen to them on MySpace pages or download them free from other
sources, such as so-called MP3 blogs.

Jeff Rabhan, who manages artists and music producers including
Jermaine Dupri, Kelis and Elliott Yamin, says CDs have become little
more than advertisements for more-lucrative goods like concert
tickets and T-shirts. “Sales are so down and so off that, as a
manager, I look at a CD as part of the marketing of an artist, more
than as an income stream,” says Mr. Rabhan. “It’s the vehicle that
drives the tour, the merchandise, building the brand, and that’s it.
There’s no money.”

The music industry has found itself almost powerless in the face of
this shift. Its struggles are hardly unique in the media world. The
film, TV and publishing industries are also finding it hard to adapt
to the digital age. Though consumers are exposed to more media in
more ways than ever before, the challenge for media companies is
finding a way to make money from all that exposure. Newspaper
publishers, for example, are finding that their Internet advertising
isn’t growing fast enough to replace the loss of traditional print ads.

In recent weeks, the music industry has posted some of the weakest
sales it has ever recorded. This year has already seen the two lowest-
selling No. 1 albums since Nielsen SoundScan, which tracks music
sales, was launched in 1991.

One week, “American Idol” runner-up Chris Daughtry’s rock band sold
just 65,000 copies of its chart-topping album; another week, the
“Dreamgirls” movie soundtrack sold a mere 60,000. As recently as
2005, there were many weeks when such tallies wouldn’t have been
enough to crack the top 30 sellers. In prior years, it wasn’t
uncommon for a No. 1 record to sell 500,000 or 600,000 copies a week.

In general, even today’s big titles are stalling out far earlier than
they did a few years ago.

The music industry has been banking on the rise of digital music to
compensate for inevitable drops in sales of CDs. Apple’s 2003 launch
of its iTunes Store was greeted as a new day in music retailing, one
that would allow fans to conveniently and quickly snap up large
amounts of music from limitless virtual shelves.

It hasn’t worked out that way — at least so far. Digital sales of
individual songs this year have risen 54% from a year earlier to
173.4 million, according to Nielsen SoundScan. But that’s nowhere
near enough to offset the 20% decline from a year ago in CD sales to
81.5 million units. Overall, sales of all music — digital and
physical — are down 10% this year. And even including sales of
ringtones, subscription services and other “ancillary” goods, sales
are still down 9%, according to one estimate; some recording
executives have privately questioned that figure, which was included
in a recent report by Pali Research.

Meanwhile, one billion songs a month are traded on illegal file-
sharing networks, according to BigChampagne LLC.

Adding to the music industry’s misery, CD prices have fallen amid
pressure for cheaper prices from big-box retailers like Wal-Mart and
others. That pressure is feeding through to record labels’ bottom
lines. As the market has deteriorated, Warner Music Group Corp.,
which reported a 74% drop in profits for the fourth quarter of 2006,
is expected to report little relief in the first quarter of this year.

Looking at unit sales alone “flatters the situation,” says Simon
Wright, chief executive of Virgin Entertainment Group International,
which runs 14 Virgin Megastores locations in North America and 250
world-wide. “In value terms, the market’s down 25%, probably.”
Virgin’s music sales have increased slightly this year, he says,
thanks to the demise of chief competitor Tower, and to a mix of
fashion and “lifestyle” products designed to attract customers.

Perhaps the biggest factor in the latest chapter of the music
industry’s struggle is the shakeout among music retailers. As
recently as a decade ago, specialty stores like Tower Records were
must-shop destinations for fans looking for both big hits and older
catalog titles. But retailers like Wal-Mart Stores Inc. and Best Buy
Co. took away the hits business by undercutting the chains on price.
Today such megaretailers represent about 65% of the retail market, up
from 20% a decade ago, music-distribution executives estimate. And
digital-music piracy, which has been rife since the rise of the
original Napster file-sharing service, has allowed many would-be
music buyers to fill their CD racks or digital-music players without
ever venturing into a store.

Late last year, Tower Records closed its doors, after filing for
bankruptcy-court protection in August. Earlier in 2006, following a
bankruptcy filing, Musicland Holding Corp., which owned the Sam Goody
chain, closed 500 of its 900 locations. And recently, Trans World
Entertainment Corp., which operates the FYE and Coconuts chains,
among others, began closing 134 of its 1,087 locations.

But even at the outlets that are still open, business has suffered.
Executives at Trans World, based in Albany, N.Y., told analysts
earlier this month that sales of music at its stores declined 14% in
the last quarter of 2006. For the year, music represented just 44% of
the company’s sales, down from 54% in 2005. For the final quarter of
the year, music represented just 38% of its sales.

Joe Nardone Jr., who owns the independent 10-store Gallery of Sound
chain in Pennsylvania, says he is trying to make up for declining
sales of new music by emphasizing used CDs, which he calls “a more
consistent business.” For now, though, he says used discs represent
less than 10% of his business — not nearly enough to offset the
declines.

Retailers and others say record labels have failed to deliver big
sellers. And even the hits aren’t what they used to be. Norah Jones’s
“Not Too Late” has sold just shy of 1.1 million copies since it was
released six weeks ago. Her previous album, “Feels Like Home,” sold
more than 2.2. million copies in the same period after its 2004 release.

“Even when you have a good release like Norah Jones, maybe the
environment is so bad you can’t turn it around,” says Richard
Greenfield, an analyst at Pali Research.

Meanwhile, with music sales sliding for the first time even at some
big-box chains, Best Buy has been quietly reducing the floor space it
dedicates to music, according to music-distribution executives.

Whether Wal-Mart and others will follow suit isn’t clear, but if they
do it could spell more trouble for the record companies. The big-box
chains already stocked far fewer titles than did the fading specialty
retailers. As a result, it is harder for consumers to find and
purchase older titles in stores.

Write to Ethan Smith at ethan.smith@wsj.com1

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