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Online Music Alters Industry Sales Tempo

The labels could gain if they persuade people to spend more, but some worry that 99-cent singles will beat out more-lucrative albums.

April 28, 2004|Jon Healey and Jeff Leeds | Times Staff Writers

A year after Apple Computer Inc. launched its iTunes Music Service, the online music industry is selling songs by the millions -- and that may not bode well for the major record labels.

Online services account for just a small fraction of overall music sales, but they're growing rapidly. And the new choices they give consumers threaten to remix the recording industry's traditional revenue streams, pumping up the volume of singles and subscriptions and turning down album sales.

Customers at three of the leading online services -- iTunes, Musicmatch Inc.'s Musicmatch Downloads and RealNetworks Inc.'s Rhapsody -- buy about 10 times as many singles as they do albums. Offline, people buy 50 times more CDs than singles.

The shift to online shopping could be lucrative for the music industry if the flexibility and convenience lead people to spend more on tunes than they do today. But some industry executives and analysts fear the opposite result, with music lovers buying a few 99-cent singles instead of $15 CDs.

And, some industry veterans worry, moving to a singles-oriented business could lead to fundamental problems for artists and labels.

"There's no money to be made from singles," said entertainment attorney Gary Stiffelman, whose clients include hit rapper Eminem. "Unless you can sell an album you can't really afford to launch the artists. The whole economics are driven by some sort of critical mass of product."

But file-sharing networks such as Kazaa have already undermined the sale of albums by making individual songs from virtually every release available online for free. Services offering paid downloads and access to online jukeboxes, some observers say, give the labels a chance to adapt and even profit..

"Consumers have moved on," said analyst Josh Bernoff of Forrester Research. "The idea that they have to consume music by the album is something that many music consumers have left behind."

The authorized services' growth over the last six months didn't seem to hurt album sales, which have rebounded about 8% from last year, after a lengthy slide blamed largely on illegal downloading.

The online music business dates to the mid-1990s, when a handful of technology companies developed ways to sell downloadable songs. The first few waves of start-ups crashed and burned, largely because of onerous restrictions and high prices imposed by the major record companies.

In the meantime, online music piracy exploded. Dozens of free networks emerged to let people copy songs from one another's computers, drawing an estimated 63 million users in the U.S. alone by mid-2003.

The first breakthrough for commercial services came a year ago today, when Apple launched the iTunes Music Store. Pressed by Apple Chief Executive Steve Jobs for better terms, the major labels enabled Apple to make a significantly simpler and more attractive offer to customers: 99 cents per song, with no real limits on CD burning or transfers to Apple's iPod portable music players. Apple said the service sold its 50 millionth song March 15.

Since the debut of iTunes, a rival business model -- selling subscriptions that let customers play unlimited songs or specialized radio stations on their computers -- has carved out a foothold. RealNetworks reported 450,000 subscribers as of March 31, up 80% in six months. Add in MusicNet on AOL, Musicmatch's premium radio services and other online subscriptions and the total approaches 1 million.

Some online music companies continue to struggle, but the sector is growing fast and steadily. Analysts estimate that the services' revenue will grow from about $65 million last year to $250 million in 2004, with $120 million or more from downloadable singles and the rest from subscriptions. CD sales totaled $11.2 billion in the U.S. last year, according to the Recording Industry Assn. of America.

So far, at least, online customers are buying a much broader range of music than is being sold in stores. General Manager Ellie Hirschhorn of MusicNet, which operates a subscription music service for Time Warner Inc.'s America Online, said about 75% of the paid downloads weren't in Billboard's Top 200 and about 60% were "catalog," or older, tracks. According to Nielsen SoundScan, more than 63% of the CDs sold in stores last week were new releases.

The differences are significant, Hirschhorn said, suggesting that online services lead people to buy music they otherwise wouldn't. Sean Ryan, head of music services at RealNetworks, said customers at Real's Rhapsody service spent about $150 a year on music, far above what the average American spent on CDs.

Even if Rhapsody prompts its customers to buy fewer CDs, Ryan said, the labels can still come out ahead because it costs virtually nothing for them to distribute music through Rhapsody.

"Essentially, they send us spreadsheets, we send them money," he said.

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