Music Biz Laments "Worst Year Ever"

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."