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Music Biz Laments "Worst Year Ever"

Labels' woes continue as album sales drop seven percent, while digital single sales surge

January 13, 2006 1:51 PM ET

It was yet another unhappy New Year for the music industry: Despite hits by Mariah Carey, 50 Cent and Green Day, 2005 saw album sales drop 7.2 percent as labels continued to struggle with adapting to the age of the iPod and the Internet. Overall, consumers bought 48 million fewer albums than in 2004, marking a disastrous twenty-one percent slide from the industry's peak in 2000, according to Nielsen SoundScan. And the holiday season, which typically accounts for forty percent of annual sales, was a bust. "It was arguably the worst in the music business's history," says Steve Bartels, Island Records president.

In contrast to CD sales, digital-song downloads jumped 150 percent in 2005 as consumers bought 352 million of them. "With digital technology, everyone's figured out that a business built only on the manufacture, distribution and sale of CDs has ended," says Dixie Chicks manager Simon Renshaw, echoing many other industry veterans. "The traditional model can't continue."

Where Are the Hits?

In 2000, the industry's last boom year, the top five albums — including megahits by Britney Spears and Eminem — sold a combined 38 million copies. The top five in 2005 sold just 19.7 million. Mariah Carey had the comeback story of the year, selling 5 million copies of The Emancipation of Mimi, the year's top album. Green Day, who sold 1.8 million copies of American Idiot in '04, sold 3.4 million more in '05. And a baby diva, American Idol winner Kelly Clarkson, broke through, selling 3.5 million copies of Breakaway.

Just below the top ten, there were signs of hope, as developing artists — Ciara, Young Jeezy, Fall Out Boy — all sold at least 1 million copies. But expected best sellers from Missy Elliott and Santana barely broke 500,000 copies. "Last year you had releases from superstars such as U2, Eminem, Lil Jon," says Best Buy music buyer Lon Lindeland. "This year didn't match that."

Latin music was the only genre to see increased sales in 2005. As the reggaeton-heavy "hurban" radio format grew — taking over rock stations in several major markets — the genre's sales leaped 12.6 percent. Sales of alternative rock fell 8.8 percent, hip-hop dropped 7.8 percent and R&B saw an 11.6 percent decline. "Consumers who used to buy a lot of hip-hop are now buying Latin records," says Virgin exec Jerry Suarez. "It's something for the younger demographic to get excited about."

Digital Music Surges

In 2005, digital downloads became a major moneymaker for the first time, earning more than $500 million as sales of digital tracks jumped from 141 million in 2004 to 353 million in 2005, and sales of digital albums rose from 5.5 million to 16.2 million. In the fall, Apple's iTunes Store became one of the ten biggest U.S. music retailers, ahead of Tower and Sam Goody. And in the last week of 2005, digital single sales exploded to a record-setting 19.9 million — outselling CDs for the first time in history — as about 11 million Christmas-gift iPods flew off shelves. The digital boom helped offset some of the labels' losses; using SoundScan's formula of counting every ten sold singles as an album, album sales dropped just 3.9 percent.

Ring tones were even more profitable, as revenues doubled to $600 million. Real tones — actual music rather than tinny reproductions — became the dominant format.

But as sales shift toward digital distribution, battles are brewing over how much downloads should cost, and who should get the money. Apple CEO Steve Jobs called the labels "greedy" for suggesting iTunes should charge more than ninety-nine cents for hits; Warner Music Group CEO Edgar Bronfman Jr. shot back, "We want, and will insist upon having, variable pricing." Artists, meanwhile, complain that their royalties from digital tracks — fourteen cents is the typical rate — don't make up for the loss of income from CD sales. "This is where the sales are going," says Josh Grier, a music lawyer for Wilco. "But being part of the transition might be a bad thing."

Major-Label Woes

As the industry contracted, market share declined or remained steady for three of the four major record companies. The exception was Universal Music Group, which sold thirty-two percent of all music and six of the year's top ten albums. Warner, which became the first publicly traded record label in 2005, managed to hold steady, thanks to Green Day and the Asylum subsidiary, which scored hits with Houston rappers Paul Wall and Mike Jones. EMI dropped just 0.4 percent, with strong releases from Coldplay and Gorillaz. "It's not a growth market," says Arista exec Tom Corson. "This is a mature market that's being attacked on all sides."

Of all the labels, Sony BMG — which merged in 2004 — had the toughest year: The company's market share shrunk three percent, it paid $10 million to settle a payola investigation (Warner eventually settled for $5 million) and had to recall 4.7 million CDs that included invasive copy-protection software. "How does a record label self-destruct?" says Darryl Pitt, manager of the Bad Plus, whose CD was recalled. "This is a pretty good way."

The labels continued to battle piracy, filing hundreds of lawsuits against peer-to-peer downloaders. But in the month of November, for instance, twenty-one percent more users traded music online than in the same period the year before.

The Indie Scene

As the majors stumbled, independent labels gained market share, accounting for eighteen percent of CD sales in '05. Indie labels proved especially adept at Internet marketing via outlets like MySpace; the emo label Victory Records sold 558,000 copies of Hawthorne Heights' album The Silence in Black and White without radio play. And several hip indie acts -- the Arcade Fire, Interpol and Bright Eyes -- sold more than 250,000 copies each. The indie model of earning profits on a broad range of small-scale releases, rather than focusing on blockbusters, may offer a new direction for the majors. "The major labels want to say the glass is half full," says Gwen Stefani's manager Jim Guerinot. "I think everybody's getting the message: You better get a fucking smaller glass. The music business is a different game."

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