U.S. CD sales turn up; new digital players key
Monday November 17, 1:46 pm ET
By Sue Zeidler
LOS ANGELES, Nov 16 (Reuters) - For the battered U.S. record industry, the holiday shopping season has already delivered a welcome gift.
After a bruising three-year slump, CD sales are showing signs of turning up, and analysts expect that another big stocking stuffer this year will be digital music players, driving traffic to a range of legal download services struggling to make a name in the burgeoning market.
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"The way people listen to music has changed. Kids are listening to music on devices and don't want to listen to whole albums," said Tom Edwards, analyst with NPD group. He predicts up to 2.5 million personal hard-drive recorders will be sold this holiday season, double the number sold last year.
Those players typically sell for $300 to $500, while players with the kind of flash memory used in cellphones and digital cameras sell for under $100.
Many of the newest devices are being co-marketed with legal online services like Apple Computer Inc's (Nasdaq:APPL - News) iTunes, RealNetworks Inc.'s (NasdaqNM:RNWK - News) Rhapsody and Roxio's (NasdaqNM:ROXI - News) Napster. The aim is to carve out a bigger audience in the same way that DVD players created their own boom in demand.
"There's been a massive push for content since DVD players took off. And with increased sales of portable music players, you're going to see more usage of legal online music sites," said Lisa Fasold, a spokeswoman for the Consumer Electronics Association.
Analysts estimate consumers will spend over $1 billion on portable players this season, while fourth-quarter CD sales should top $3 billion. In fact, after gains in recent weeks, the quarter's CD sales look poised to top the 221 million units sold last year, said Geoff Mayfield, director of charts for Billboard Magazine.
Experts say the recent rises in sales of CDs and player devices are both driven by some of the same factors. These include the rebound in the economy and more awareness by consumers of the legal risk in using renegade sites like Kazaa since the Recording Industry Association of America (News - Websites) began suing heavy users.
"If downloading catches on, it will save the record business. This is a crucial transition time," said Forrester Research analyst Josh Bernoff.
Forrester Research predicts the online music sector will account for $1.4 billion or 11 percent of the industry's saleswithin three years, and 33 percent by 2008.
"The upcoming holidays become very important in terms of making a broad swath of consumers aware of these online music services," said Mike McGuire, analyst with GartnerG2.
PLENTY OF BUZZ; WHERE'S THE MONEY?
The marketing heat surrounding the competing download services has heightened in recent weeks. Time magazine, for example, named Apple's iTumes Music Store as the "coolest invention" of the past year.
"The dirty little secret of all of this is there's no way to make money on these stores," Apple Chief Executive Steve Jobs told the magazine. For every 99-cent song iTunes sells, 65 cents goes to the record label, 25 cents pays operating costs and only about 10 cents is pocketed by Apple, Time said.
So what's in it for Apple? The site drives sales of the highly profitable iPods, Jobs said.
Portable players were introduced five years ago, enabling fans to download and transfer songs in the MP3 compression format from outlawed services like Napster.
The record industry sued the original MP3 player's maker, Diamond Multimedia, in a bid to stem the growing tide of file-sharing, but lost the case. More manufacturers jumped in the market with MP3 devices offering more storage.
While the record companies never entirely accepted these devices, several label-sanctioned online services are now compatible with many of the newest MP3 players that also allow the direct transfer of copyright-protected music files.
In addition to Apple's iPod, other popular players are made by Creative Labs, Panasonic, Samsung Corp (000830.K), Rio, Archos, iRiver and RCA.
