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Music sales rebound on cheaper CDs, DVD sales increase

Posted By Barry Ritholtz On October 2, 2004 @ 7:07 am In Finance,Music | Comments Disabled

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Here’s a topic that simply will not go away: The Music industry and CD sales. U.S. music sales rebounded 3.9% in the first half of 2004, compared with a drop of 12% in same period last year. The U.S. accounts for ~40% of the world’s music sales.

Ignore what the industry is claiming in their explanation for this phenomena — they are either clueless or lying or both (i.e., clueless liars). Here’s the straight dope:

In the first half of 2003, music sales were off for the same reason that ALL GDP activity was slow: Consumer sentiment was quite negative during the run up to the Iraq invasion, which began March 19, 2004. For some strange reason, people just do not feel like running out to buy the latest pop hit when our nations blood is about to be spilled. (duh)

Now, the initial fright regarding the war is well behind us (although we still have other concerns, such as Oil prices [1]. Oh, and that little insurgency thing over in Iraq. But these aren’t the same in their impact on Consumer sentiment as the pre-war period was.

Nevertheless, we see a rebound in music revenue on a surge of music-video DVDs sales, whose growth was in excess of 20%, according to the International Federation of the Phonographic Industry (IFPI). DVDs now account for 7.2% of total recorded music volume, more than double the 3.1% they represented in 2001. My own expectations for this category is a sprint towards 25% of total music revenue by 2010.

USA Today [2] reported that the “$32 billion industry showed signs of life with a U.S. fourth-quarter sales spurt of 5.5% in 2003, according to the Recording Industry Association of America (RIAA). Extending that through the first half of this year means the industry may actually have turned the corner on four years of declines.”

There were two additional factors which likely contributed to the increase in sales:

Cheaper CDs. The average retail price for CD albums fell nearly 4% to $13.29 in the first quarter of 2004, vs. $13.79 last year, according to NPD Group’s MusicWatch PriceLab.

Rise in P2P usage. Internet measurement firm BigChampagne notes that the number of people using file-sharing services rose to 6.8 million in August 2004 vs. 4.3 million in September 2003. As music on the Radio continues to undergo its slow death, P2P is one of the few places consumers can go to in order to find new music.

Problems for the industry still abound. CDs remain way too pricey, according to many consumers. The excessively high prices of CDs are a major reason why music video DVD sales continues to be so robust. Consumers have figured out that paying $15 for a 45 minute audio-only disc is a comparatively bad deal when a 2 hour audio/video DVD can be purchased for about the same price.

Note the big spike up in P2P usage; I believe this is ultimately good for artists trying to get discovered, especially since there is so little music on the radio or MTV. P2P drives CD sales, and if they were priced competitively — under $10 — it would drive even more sales.

The Music Industry also continues to demonstrate a shocking ignorance of basic economic theory. Until they figure out that higher prices = lower sales, I expect them to remain stuck in the mud, while their audience circumvents their business model evey way possible . . .

Sources:
Music sales bounce back at least a bit [2]
Michael McCarthy
USA TODAY, Friday, October 1, 2004

http://www.usatoday.com/money/media/2004-09-30-music_x.htm

DVD sales help slow recorded music decline [3]
Jeffrey Goldfarb
The Guardian, Friday October 1, 2004

http://media.guardian.co.uk/site/story/0,14173,1317273,00.html


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URL to article: http://www.ritholtz.com/blog/2004/10/music-sales-rebound-on-cheaper-cds-dvd-sales-increase/

URLs in this post:

[1] Oil prices: http://bigpicture.typepad.com/comments/2004/10/oil_an_overview.html

[2] USA Today: http://www.usatoday.com/money/media/2004-09-30-music_x.htm

[3] DVD sales help slow recorded music decline: http://media.guardian.co.uk/site/story/0,14173,1317273,00.html

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