What Will the Music Industry Look Like in Five Years?

What will the music industry look like in five years? In a new study by Forrester Research, "U.S. Music Forecast 2008 to 2013," industry analysts attempt to cook up some numbers. No huge surprises here: The U.S. music market is expected to shrink over the next five years from $10.2 billion to $9.8 billion. Digital music sales are expected to grow from 18 percent to 41 percent of the total (as physical product shrinks from 64 percent to 40 percent of the market). Sonal Gandhi, the lead analyst on the study, spoke with Rolling Stone about her findings.

You're predicting that digital music will grow from 18 to 41 percent of total sales in 5 years. That seems a little low. Last week Atlantic was already claiming that 51 percent of its revenue is already coming from digital.
We built this market in the fall of this year and the Atlantic story just came out last week. The Atlantic story may be an exception. The market has suddenly gone into a recession and we're hearing stories today how CD sales are not going as expected. We tend to be a little more conservative on our forecasts, but I think we're going to stick with this number for now.

The flip side to that is that physical format, mostly CDs, will shrink from 64 to 40 percent of the market. So digital and physical product according to your predictions will make up the same percentage of the marketplace in 2013.
Yeah, and the missing portion is the ringtones and ringbacks and we don't think that's a growth market either. Ringtones have been more or less flat and ringbacks are small.

Your prediction that the U.S. music market will shrink in five years from $10.2 billion to $9.8 billion also seems like a conservative estimate.
We're not taking into account some of the new models that are coming into play. We haven't predicted what the licensing revenues are going to be for something like a Nokia Comes With Music. This is purely based on revenues from direct sales or services to the consumer.

Have cell phones caught on at all?
Right now we're not seeing a very high listenership on cell phones for music. People who listen to music on their phones are a somewhat wealthier, younger demographic that already has MP3 players. They buy music for the MP3 players and the chances are that they load the same music to their cell phones. So they're not buying new music for their cell phones.

When does the market for portable MP3 players become totally saturated?
I think we're seeing it might flatten out towards the end of the five year period.

There was a surprisingly significant bump in vinyl sales this year over last.
Vinyl is such a small chunk that it doesn't really make a big dent in the overall number.

What's the biggest surprise in these findings?
Two things are happening in terms of digital music: One is that people are buying MP3 players and the growth is still substantial. Even though we think it's going to flatten, it's still growing. Not everybody who has an MP3 player necessarily buys digital downloads, but we have seen that that number has grown and we predict that number will continue to grow. Now, people who were early adopters of MP3 players were also heavy music fans, so they tend to spend more on digital downloads. As more of the mass market starts to own MP3 players and become digital music buyers, they're not going to spend as much on digital downloads as the early adopters, so the average spending on digital downloads is either going to stay the same or not grow much.

So it's a wash. There was some talk that that the 99 cent song price may be renegotiated along a sliding scale depending on how popular the song is.
Pricing is going to play a bigger role going forward because Amazon is coming out with all these variable pricing models. People are still locked into the iPod and iTunes mentally. They have an iPod and it works well with iTunes and that's how they're used to buying. With variable pricing, Amazon can steal customers away from iTunes. And it will be those savvy music fans that know they're getting a better deal there.

And Amazon is all DRM-free.
We've seen that DRM-free so far only appeals to those heavy music fans right now. It isn't holding people back from downloading music. ITunes is still the biggest player out there. Once these fans realize they have so much more choice, then the market will follow them eventually.


So a potential end to iTunes' dominance?
It's hard to say. They're so big.

We're at the end of the year. Did anything happen in 2008 that struck you as particularly noteworthy?
What's been noteworthy is all these other business models that all these labels are willing to participate in. They've shown a willingness to make money from ad-supported music with deals with MySpace, for instance. Hopefully the Webcasting issue will be resolved sooner or later and everyone will go home happy. Definitely 2008 was a good year where labels did try to work with digital music models and come up with terms so that those models can ultimately survive without having to pay huge fees for playing music. What remains to be seen is how well they can support themselves with ads because of what's going on in the economy today.

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