Sales of CDs and DVDs
 

Blog linky

HMV I guess is the British version of Barnes & Noble. The company claims that its CD and DVD sales will only decline by 26% and 17% respectively by the year 2010.

I think they are wildly optimistic.

Opinions?

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From the link:

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On the positive side small declines in large markets usually mean massive growth in the new markets that are replacing them - in this case digital music and video.

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Right but this is not necessarily monetizeable...

26% is probably their top-range forecast but is also fairly significant decline (taking into account an already sizeable decline over past 5 years). Don't think it's wildly optimistic at all for CDs.

The DVD number is much more difficult to forecast imo. My guess is the number is not too far off but we will see a rapid acceleration in decline post 2010.

-Al

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I think they are wildly optimistic.

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depends on a lot of things, I don't think they are too optimistic though, its less than 3 years, and it's not like tons of people that don't download music are gonna suddenly start in that time period. If a new technology comes out, then obviously its a whole different game.

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In the venture industry we get caught up in the inevitability of massive market disruption and these numbers are a reminder that even in a market as obviously doomed as CD sales there is still years to run.

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I used to work in venture and believe this is very true. I'm not very familiar with the music business, but work in TV and can tell you that people have been predicting the demise of Network TV since Michael Lewis' cover story in NYT Magazine in 2000.

A combination of aggressive growth rates (DVR penetration is nowhere near what analysts forecasted 6 years ago), public perception created by the cultural elite at newspapers and magazines, and frankly slow consumer adoption of new business models, tend to result in far too early forecasts of "the demise of a mass market industry due to technology paradigm shift".

-Al

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its less than 3 years, and it's not like tons of people that don't download music are gonna suddenly start in that time period.

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I don't think these numbers are too out of whack, but, uh, yeah i think we'll see "tons of people" start downloading that haven't.

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depends on a lot of things, I don't think they are too optimistic though, its less than 3 years, and it's not like tons of people that don't download music are gonna suddenly start in that time period. If a new technology comes out, then obviously its a whole different game.

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I'd imagine this technology being introduced very soon and then I can't imagine dvds not becoming obsolete.

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I work for the largest wireless ISP in Indiana and we began getting letters from the government last year for terminating accounts of customers who were downloading copyrighted material via our network. The letters had the individual IP addresses for the exact users on our network. I had never seen anything like this before. Our engineers designed a few programs to block the ports the file sharing sites use and we no longer allow P2P on our network. I can see the government stepping in and completely putting the issue in the hands of the larger ISP's to hold them liable for any illegal downloading that happens on their network. We only have about 6,000 customers but the larger nationwide networks will turn off that switch as soon as they get sued for large dollars by the government. I doubt consumers will have the access online that would allow the file sharing to continue indefinitely. That said, I'm sure there will be new technologies coming out that will render individual CD's and DVD's obsolete for a consumer.

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its less than 3 years, and it's not like tons of people that don't download music are gonna suddenly start in that time period.

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I don't think these numbers are too out of whack, but, uh, yeah i think we'll see "tons of people" start downloading that haven't.

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For a significant group of new people to jump on these technologies they're going to have to become brain dead simple. iTunes is close, Rhapsody/Napster are further away, torrents aren't even in the ballpark yet.

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its less than 3 years, and it's not like tons of people that don't download music are gonna suddenly start in that time period.

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I don't think these numbers are too out of whack, but, uh, yeah i think we'll see "tons of people" start downloading that haven't.

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For a significant group of new people to jump on these technologies they're going to have to become brain dead simple. iTunes is close, Rhapsody/Napster are further away, torrents aren't even in the ballpark yet.

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Even today, only 70-75% of Americans have Internet access. There is a significant portion of the population that wants nothing to do with it.

Separately, I see CDs dying before DVDs. DVD files are much larger.

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its less than 3 years, and it's not like tons of people that don't download music are gonna suddenly start in that time period.

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I don't think these numbers are too out of whack, but, uh, yeah i think we'll see "tons of people" start downloading that haven't.

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For a significant group of new people to jump on these technologies they're going to have to become brain dead simple. iTunes is close, Rhapsody/Napster are further away, torrents aren't even in the ballpark yet.

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Even today, only 70-75% of Americans have Internet access. There is a significant portion of the population that wants nothing to do with it.

Separately, I see CDs dying before DVDs. DVD files are much larger.

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I saw a statistic on that visual data site google bought that said it was 68% (I think, something <70 for sure). I couldn't believe that.

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Evan - actually I'm in middle of reading a pretty good Piper Jaffray research report came out Feb' 07 (User Revolution: Internet as Mass Medium). They're saying 8/10 Americans have Internet access at either work or home (though 71% HH penetration in US).

-Al

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It could depend on the evolution of DRM/copy protection stuff. I mostly buy CDs b/c I want pure MP3s. But I would probably never buy a CD again if I could download MP3s from iTunes.

Re: Sales of CDs and DVDs
 

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Evan - actually I'm in middle of reading a pretty good Piper Jaffray research report came out Feb' 07 (User Revolution: Internet as Mass Medium). They're saying 8/10 Americans have Internet access at either work or home (though 71% HH penetration in US).

-Al

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Stats widely vary by source (Nielsen, Census, Forrester, etc. all have different numbers), but 70-75 is the average.

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its less than 3 years, and it's not like tons of people that don't download music are gonna suddenly start in that time period.

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I don't think these numbers are too out of whack, but, uh, yeah i think we'll see "tons of people" start downloading that haven't.

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why do you think that? It's not like its getting easier to do, and most people with the desire to download music would have started already I would think.

As for CDs and DVDs becoming obsolete, I'm not familiar with upcoming technologies that would make you think this. Blu-Ray or whatever those are don't see to be catching on from what I have seen and heard, though it is limited. What else is coming out though?

Also, I do think that CDs will die much faster than DVDs.

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Sale of the discs will decrease - but not due to illegal downloads.

Pay-per-view streaming / whatever it gets called will rule the day and increase profit-per-movie as a lot of middle men get cut right out of the picture.

This is good for consumers, good for the studios, and horrible for all the middle-men and the economies they are involved in.

No reason music CD's wont go the same way - it has already started. The legal models that will be put in place by HMV's current business associates will be what kills sales, not piracy.

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I don't think these numbers are too out of whack, but, uh, yeah i think we'll see "tons of people" start downloading that haven't.

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why do you think that? It's not like its getting easier to do, and most people with the desire to download music would have started already I would think.

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People adopt new technologies at different rates. My parents just got a CD player 3 or 4 years ago and just got a DVD player last year.

A friend of mine who's a technology analyst quoted me something a few years back that said something like 50% of American PC users had a home network. I told him that was crazy and I couldn't forsee ever needing a home network for anything. Like 6 months later, I got wifi to play poker on my laptop.

I must get 20 spams a day advertising song downloads or ipod/mp3 players. It is and will continue to get easier and more people will adopt it.

By the way, from today's WSJ:

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Sales of Music,
Long in Decline,
Plunge Sharply
Rise in Downloading
Fails to Boost Industry;
A Retailing Shakeout
By ETHAN SMITH
March 21, 2007; Page A1

In a dramatic acceleration of the seven-year sales decline that has battered the music industry, compact-disc sales for the first three months of this year plunged 20% from a year earlier, the latest sign of the seismic shift in the way consumers acquire music.

The sharp slide in sales of CDs, which still account for more than 85% of music sold, has far eclipsed the growth in sales of digital downloads, which were supposed to have been the industry's salvation.
[Music]

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.

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Colt - Would you say it's ironic that you copy and pasted an entire copyrighted article in this thread?

Anyways, the take away points from the WSJ article are that CD sales are down 20% year-on-year in the US. Chart topping CD's used to sell 500k-600k/week. Now they only sell 50-60k/week.

Al - One reason I posted the link to the blog was that the author never questioned HMV's forecast. He took the forecast as fact and then goes on to conclude that technology adoption takes much longer than we (meaning VCs) anticipate. Well, he is kinda right about that. But what he doesn't seem to realize is that the technologies to make CDs and DVDs obsolete as a method of media distribution, have been in development for years already. I think what he meant to say is that consumption trends spread linearly, an idea I disagree with.

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I think what he meant to say is that consumption trends spread linearly, an idea I disagree with.

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Be interested to hear you expand on this Boris (also didn't know you were a VC... figured you were in the chainsaw biz or something).

If we define "consumption" in this case as "media / content consumption" - there will be a period of time (we are in this era) that consumption trends *do* spread linearly (if we use "widespread available technologies" as a starting point). For example, IP issues extend this unfortunate (for consumers) era's duration.

(For years now, big media companies have been planning for / forecasting / trying to understand the "User Revolution", as an aside.)

I do think though there will be an inflection point and over a very short amount of time (couple years at most), user behavior will change radically. (It's possible those couple years will be before 2010 for CD sales, but I don't see it happening for video that soon).

-Al

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Another issue that affects CD, but not DVD sales, is the ability to purchase single songs. Although this was a minor problem in the late 80's/early 90's (w/the single cassette), lots of people no longer purchase entire albums unless from a favorite artist.

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To me the biggest reason CD sales are crushed is that it's just so much easier to download music. Who wants to go all the way to best buy, have to go through a crowded parking lot and then wait in line at the cashier, just so you can pay for a CD that only has three good songs on it anyway.
And even legal downloads are a pain in the ass. It takes like 1/10 the time to download something on [censored] (L-I-mewire is censored, lol!) or whatever you use than it does to go through all the bother of itunes. Plus those DRM things that only let you play the songs on certain players are a joke. Not only is it free, but it's faster and better to download illegally. Until they do something about that, people are going to continue to steal.