December 28, 2003

Today's grocery list: milk, bread, music

By Jeanne Anne Naujeck
 

When Mike Olsen opened his Kroger circular and saw the ''Napster music card'' for sale, he knew the digital era had arrived.

That the cards, which are redeemable for song downloads, are sold along with milk, tuna and eggs floored Olsen, who is president of Compendia Music Group, a Nashville-based independent record company.

''The whole idea that a prepaid card could be so ubiquitous might mean we sell more music,'' said Olsen. ''You'd better embrace it now because the future is here.''

It's a good symbol of just how mainstream downloading became in 2003 — and it may be a long-awaited sign of hope for the music industry.

Last December, there was widespread gloom along Music Row about the steady slide in CD sales and the growing problem of people sharing music free. Overall music sales were down 13.2% at this time last year, and record retailers such as Tower, CD Warehouse and Musicland were closing branches and filing for bankruptcy as though music was, well, going out of style.

It wasn't, but CDs were. Tired of paying $17.99 for discs, young people were swapping songs over the Internet and stuffing them onto portable plastic devices called iPods. And they didn't like the industry's own sites where consumers could pay to download songs — probably because they were funded and designed by record companies and favored certain artists, said Rich Peluso, co-president of Chordant Distribution Group, a division of EMI Christian Music Group.

''To the consumer, the artist is the brand. The consumer wanted an easy, simple way to access all artists,'' he said.

Then came Apple Computer, the arbiter of cool in technology. Its iTunes Music Store boasted easy, fast, cheap (99 cents a song) downloading, and its splashy product introduction positioned Apple founder Steve Jobs to be as much of a rock star as the artists with whom he posed in ads.

''Steve Jobs is a marketing genius,'' said Cary Sherman, president of the Recording Industry Association of America.

''He has a tremendous sense of how to make news and get people excited about his products. He also has an incredible technology.''

Peluso said iTunes' instant success — it has sold more than 25 million singles since its April launch — had energized the music community in a less tangible but equally important way.

''In '02 and early '03, as we saw peer-to-peer file sharing grow exponentially, there was a lack of hope,'' he said.

''Apple launched a phenomenal service with all artists and a consumer brand that people could trust. It got traction. When we saw millions of songs being sold, it brought back hope.''

As of Dec. 21, overall music sales were down only 4.6%, according to Nielsen SoundScan. That doesn't include paid downloads, which the service began reporting in July. Including those, sales are down just 2.2%.

Consumers also have a wider and better array of online music stores such as Musicmatch, Rhapsody, MusicNet, MusicNow, Buymusic, the now-legal Napster and Walmart.com, most selling downloadable singles for less than a dollar apiece (Wal-Mart is cheapest at 88 cents). Next year, Coca-Cola, MTV, Microsoft, Sony, Amazon, Dell, Hewlett-Packard and others plan to launch branded services.

''It's certainly a legitimate channel now,'' said Adam Mirabella of Warner Music Group's sales and retail marketing arm WEA Corp. ''A year ago it was a much more clouded view as to whether it would be successful.''

Within five years, Forrester Research analyst Josh Bernoff predicts, a third of music sales will come from downloading. This year, Peluso figures, tallies will show 1% of music sales were from downloads — about as much as CDs and DVDs made the first year each was introduced.

Digital music has an even greater advantage in that computer sales penetration is so high that most people already have the hardware they need to download.

''A year ago … downloading, ripping and burning were scary terms to almost the entire U.S. population, and now they're familiar,'' an upbeat Peluso said. ''The potential for upside on digital music is very good.''

While downloading hasn't made much money yet, SoundScan reports extremely rapid growth. More than 1.4 million songs were downloaded the week ended Dec. 21, and 1.3 million the week before, the service said.

All the major record companies are offering their music on most of the well-known online stores, including country music by artists signed to their Nashville labels. An Apple spokeswoman said that more than 200 independent labels also had signed up with iTunes.

Costs to the labels associated with making their catalogs available online include copyright clearance, digitizing and encoding the music. Most record companies have dedicated some of their staff or hired new people to deal specifically with online retail.

''More than anything, it just costs time,'' Olsen said. Compendia started out by posting its 25 or 30 best-selling (out of 500) titles.

''On one hand, it is the future and we need to be part of it. On the other hand, it's no great source of income yet for anyone. There's no question we want to be there, but let's match our efforts with potential rewards.''

At this point, music downloading is far from ubiquitous, especially among the demographic most drawn to country and Christian music and the adult audience for most of Compendia's music. The vast majority of downloading — 88% — is done by people younger than 23. A Forrester Re-search report showed that nearly half of consumers ages 12-22 downloaded music in July. And half of downloaders said they now bought fewer CDs. No one in the music industry wants to miss the boat.

''Why not?'' said Nick Hunter, president of Audium Records, a Nashville-based independent with an artist roster that includes Robert Earl Keen, Charlie Daniels Band, Dwight Yoakam, Sammy Kershaw and Daryle Singletary. ''It doesn't cost you anything, and it makes your music available to more people. There's no reason not to.''

Though Hunter notes that SoundScan download charts carry few Nashville acts (Apple's Top 100 singles Friday included only two country songs — Toby Keith's I Love This Bar at No. 72 and Alan Jackson's Remember When at No. 76), the country music business has to take advantage of any outlet for music as retail shelf space shrinks. The online space also offers unlimited room for inventory — which could increase sales of an artist's older albums — called ''catalog'' in music industry parlance.

Friday, Johnny Cash's Ring of Fire was No. 8 on the country download chart, I Walk the Line was No. 19. Roger Miller's classic King of the Road was No. 20.

''We're selling several of every song or album, which shows the consumer is responding to the depth,'' Peluso said. ''The upside is to get your catalog online.''

EMI CMG has 40,000-50,000 songs in its catalog, but only about 10% are cleared for online sales. The goal is to get every song cleared by March 31.

''The availability of content is the biggest roadblock right now. It is one of the most important key issues in the short term for our company,'' Peluso said, comparing the flow of music to online distribution as a trickle that will turn into a flood.

''2004 will be the year of swallowing the elephant.''

Christian music got its first dedicated site last month with the opening of LifeWay Christian Stores' online retail download site. It offers not only contemporary Christian rock and pop but another market segment — well-known church music and hymns that can be downloaded as singles.

''Artists with higher visibility (such as Evanescence and Jars of Clay) do well in mainstream channels,'' said Terry Hemmings, president and CEO of Provident Music Group, a part of BMG.

Just like his counterparts in the secular world, Hemmings has worried about the effects of file sharing on Christian music sales. But he's cautiously optimistic about the future.

''If (illegal file sharing) just levels off, I think we will have made great strides, but I'm not looking for online to grow significantly for the next few years. And we want to help it develop properly.''

Sherman, of the RIAA, said the trade group's high-profile lawsuits this fall against egregious file-sharers significantly stemmed illegal downloading, citing one study that showed a 53% drop in traffic on file-sharing site KaZaA. Lawsuits will continue despite last week's federal court decision that Internet service providers do not have to provide RIAA with names of individual file-sharers, he said.

Despite that setback, the year is ending on an upbeat note, Sherman said. ''Sales improved over the last quarter, and that is a dramatic change. CD sales are picking up, downloading is booming and major new entrants into the downloading business will be getting online.''

''Illegality of file sharing is becoming well known and is resulting in behavioral changes. And that is all very good news for an industry that hasn't seen a lot of good news in the past few years.''