CD Sales an Improper Proxy for Measuring Purchased Music Demand

Every now and then I see a commentary on the music industry that notes reduced CD sales (especially to young people), and then goes on to blame the RIAA’s attacks on Napster (NAPS), lawsuits against down loaders, etc, as the cause. The basic idea is that young people are so angry with the record companies that they’re refusing to buy CDs, and that the music industry dug its own grave by not embracing file sharing, suing people, etc. While I respect many of these commentators greatly, I think they’re missing the boat as they’re not considering how young people actually listen to music these days.

The problem with the above argument is that it basically assumes that CD/DVD players are the preferred music listening device amongst young people, or that the preferred method of acquiring music is via a CD. In truth: iPods/MP3 players, followed by personal computers, are the most popular listening devices. A lot of people my age don’t even own stand-alone stereo systems, as they listen to all of their music on their iPods or on their computers. Even if they own CDs, the bulk of them are burned from their digital music collections, as opposed to being pre-recorded.

My age group (early 30s and younger) prefers digital music formats over CDs, so much so that even if the music industry had been the one to launch Napster, had never sued anyone, shut down a file sharing network, etc, CD sales would still be declining. In my opinion, the focus on CD sales is a remnant from a time when only physical formats were available, and the primary listening device was a CD or tape player. The real issue is a change in the media consumption pattern that has shifted from CDs being the only choice, to a situation where the consumer has multiple choices and has a preference for digital formats.

CDs can no longer be used as a proxy for determining the public’s interest in purchasing music; instead, you have to aggregate digital downloads (paid and free), file sharing between friends and CD purchases. Additionally, you have to account for the fact that being able to download individual songs frees people from having to purchase a CD for only a couple of songs, thus depressing album sales be they digital or physical.

An additional “X-Factor” in the digital music world are services like Real Network’s (RNWK) Rhapsody, which provide the consumer with access to tens of thousands of albums (that can be synched to a portable device) for a small subscription fee. Just think about it: for $9.99/month, many customers can have access to nearly all of the music they want to listen to, both on their home computer and portable devices. If you can subscribe to most of your favorite albums for $9.99/month, why would you buy a digital download, let alone a CD? Digital subscription services have the ability to not only depress CD sales, but they can also depress digital download sales.

Considering all of the above, it would be quite easy for an individual consumer to dramatically reduce their CD purchases, but actually acquire significantly more new music and spend less money at the same time. As a result, you can’t use CD purchases and/or money spent on music as an effective gauge of the public’s interest in purchasing music, as neither one can accurately measure demand across all of the options consumers have to buy music.

Digital music is such a game changer that it’s difficult to make a direct comparison to the days when only CDs were available. Over the past ten years, the way music is bought and listened to has changed dramatically; as a result, you can no longer use the same old metrics to gauge the public’s interest. The only way to effectively gauge the public’s interest in buying music is to compare sales over the options of the past 3-6 years, and then look at total purchases across all formats. In other words, are aggregate music purchases across all options/formats increasing in the post “iTunes world”?

According to Nielsen’s Sound Scan:

CD purchases declined 15% in 2007 compared to 2006, however digital downloads increased by 45% and total music purchases including CDs, Singles, Digital Downloads and Music Videos rose 14% from ’06.

Simply put: demand is increasing and consumers are spending more across all of the options available.

While there are undoubtedly angry music fans that are refusing to buy CDs on principle, they’re undoubtedly a small minority, as demand for music still remains strong.

What’s happening to the music industry (companies and artists) is that selling CDs is more profitable than selling digital formats, and as demand for music shifts from CDs to the digital domain, they suffer financially. Moving forward, the big question is whether or not the music industry will find a way to monetize the digital world as well as they did the physical one.

Sources:

The NY Times (Via the AP) – U.S. Album Sales Fell 9.5% IN 2007, January 4, 2008.

Comments

[mrtaxx:]

Well said!

2008 Apr 04 04:51 AM

[brando:]

The statisitics I have seen do not verify that digital revenue is at all close to making up for lost physical revenue. Although I understand the public's desire to thwart the record labels from forcing them to repurchase their physical music libraries in digital form, that argument does not hold for young people as most have never had physical music libraries. A serious social issue is developing in the current economic environment for music: the sudden lack of respect for property and the law. Almost all music is copyrighted, meaning it generally cannot be copied for an unrelated third party without the creator/owner's permission. Such permission normally requires compensation. It is morally wrong and against the law, illegal, for people to offer their digital music libraries to millions of strangers via peer to peer file "sharing" (really stealing) networks and it is just as illegal to download these files without paying the artists who created them and the record labels who financed them. I am amazed and confused by the popular argument that record companies should not be suing their fans. People who steal your product are not fans. I'm sorry to say, they are nothing more than common thieves who should be prosecuted to the fullest extent of the law in order to protect one's rights as a property owner. The situation is entirely out of hand. If public opinion does not change soon, or if the ISPs do not step up and voluntarily filter this illegal content crossing thier networks, congress should intervene and provide statutory relief. Copyright law is the linchpin holding together the greatest movement of creativity the world has ever known -- the U.S. music, record, book and software industries. P2P "sharing" of uncompensated digital files has to be stopped.

2008 Apr 04 08:49 AM

[deaverb:]

Author makes excellent points about his generation's preferences, which are spilling over to older people such as myself (64). Now my music is almost all iPOD, iPHONE, MP3 played. I buy an occasional used CD and use it form these devices. He is trend right--and early.

2008 Apr 04 10:03 AM

[Markham Lee_:]

Responding to a couple of comments, thank you for the interest BTW.

1) Around my Jr year of college people would say to each other: "Dude, don't buy that CD - I can send you the MP3s over the network". Than Napster came along and it got even easier to do. When people argue for file sharing, they just want the convenience of free music IMO.

I can see the indie music argument, but it's not like you can browse music on a P2P network, you have to know what you want in advance, so demand is still driven by pop music.

I think Pandora's box has already been opened though, once people can get the product for free and it's seen as having the same value as the paid version. Downloaders don't feel as if they're getting a lesser product when they download Mp3s vs. buy CDs, paid downloads don't help as you're getting an identical product that you can do more with and not paying for it.

2) I think the CD is a dying format as my generation (and younger) prefers the iPod/MP3 player and digital format combination over the physical format and a CD player. As an audiophile I purchase all CDs as I like the superior sound over digital formats, which makes me an oddity amongst people my age. A lot of my friends almost look at it as some sort of throwback hobby, like people who collected Vinyl in the 90s.

I can think of very few people my age who still purchase CDs, and the ones that do are usually audiophiles or people who just haven't embraced the digital world.

The question is: how will the record companies survive in this new world? They're easy to vilify but how many companies can survive people either getting the product for free and/or in a way that's significantly less profitable?

2008 Apr 04 02:42 PM

[Mohit:]

It is interesting to note that the distribution channels are pushing the music industry to come to terms with economic reality. However, the industry needs to put in more effort toward revenue models. Here's more:
randomjunkyramblings.b...

2008 Apr 06 04:18 PM

[everycritic:]

"think the CD is a dying format as my generation (and younger) prefers the iPod/MP3 player..."

I'm not convinced. I'm 43 and my generation (generally speaking)collected music via cassettes in a remarkably similar way to how students are collecting them digitally today. (The technology is 1000 times better now, of course, but the IDEA of getting portable, cheap music when you're young is the same.) Then when we got older, got some disposable cash and interacted with our music differently than we did in college, we started wanting to build physical libraries. I am not convinced that in 15 years, today's iPod generation will not be looking to build physical media music collections. CDs are still the best for archiving. I think MP3s replaced the cassette, not the CD.

2008 Oct 16 05:36 PM