Online Music Sales Are Down, But Is File Swapping to Blame?

Online sales of recorded music have declined for three consecutive quarters, according to a report by comScore Networks released yesterday. The audience measurement firm blames online file swapping and CD burning for the decline, but not everyone buys that argument.

Online music sales through the third quarter of 2002 were $545 million, down 25 percent from $730 million in the same quarters last year, according to comScore. Moreover, the decline in such sales is accelerating, the company reported. Compared with the same periods last year, sales dropped 12 percent in the first quarter, 28 percent in the second and 39 percent in the third.

The decline in online music sales also reportedly outpaces the decline in music shipments overall. While the Recording Industry Association of America reported in August that total U.S. music shipments fell 7 percent in the first half of 2002 compared with the first half of 2001, comScore claims that online sales of music fell 20 percent from $531 million to $424 million in that period.

ComScore claims that “Internet file swapping and CD burning are having a severe negative impact on music sales among Internet users.”

Since Napster's demise, U.S. consumers have flocked to alternative file-swapping sites such as Kazaa and Morpheus, comScore claims. The two increased their monthly at-home user bases from less than 1 million in second-quarter 2001 to 4.6 million and 7.1 million, respectively, in first-quarter 2002.

Also, 14 million consumers used the top six file-sharing applications in September, according to comScore, Reston, VA.

But at its height, Napster, which began bankruptcy proceedings in June, claimed 36 million users. Some reports had the service as high as 60 million users. What's more, the volume of files was far greater than that on any file-swapping service available today. As a result, at least one executive who markets music and related products to young people questions comScore's logic.

“Napster was the big daddy of them all. You could download anything,” said Jeffrey Hyman, CEO of digital marketing services provider Cog1, San Francisco. “I do believe that file sharing is playing a role [in the decline of online music sales], but why when Napster was in its heyday were online music sales not going down as dramatically?”

Also, people use current file-swapping services for more than just music. For example, pornography and video games are apparently popular on the services.

“People only logged onto Napster for MP3s [music files],” Hyman said.

Cog1 maintains a list of 3.5 million e-mail addresses of people in their teens and early 20s to which it promotes music, events, clothing and other products for clients.

Hyman said that instant gratification plays a strong role in Generation X and Y music buying behavior.

“I have a very skewed list demographically, so I can only tell you how Gen X and Y are behaving [but] when a young person hears a song they like, they go out and get the CD the quickest way possible,” he said. Hyman added that there is no monetary incentive for a music buyer to go to, say, and wait a few days to have the music delivered.

Hyman said he urges the smaller record labels that promote to his list to “give away a download or two” to spur retail sales.

“When a person likes a song or two, they want to get the whole album, and it's pretty hard to find an entire album up online [available for free download],” he said.

Still, he said, Cog1 has achieved 3 percent to 4 percent response rates on “buy” buttons in clients' e-mail promotions.

ComScore claims it monitors the behavior of a volunteer panel of 1.5 million Internet users and extrapolates. The comScore study only considered online purchases of recorded media such as CDs and tapes and did not look at paid music downloads.

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