RIAA Was Right … The Sky Is Falling

It turns out the Recording Industry Association of America (RIAA) was right all along — a new report shows that continued use of file-sharing services and CD-burning has cut sharply into online sales of recorded music.

In fact, figures from Reston, Va.-based research and measurement company comScore Networks say that 2002 online music sales through the third quarter were $545 million, down 25 percent from the $730 million spent over the same period last year.

And for the RIAA, which was complaining back in February , the really bad news is that the decline in online sales of recorded music has accelerated throughout the year, with sales declining versus year-ago by 12 percent, 28 percent and 39 percent in the first, second and third quarters of 2002, respectively.

Why? Because millions of Internet users continue to use online file-sharing services even as some of these applications, like Napster, have vanished. Kazaa, for one, has helped to fill the “Ded Kitty” void and had 10 million home users in September, according to comScore.

But despite slumping sales, “the Internet will not kill the music industry,” said Steven Vonder Haar, a digital media analyst at Interactive Media Strategies in Arlington, Texas. But “it may prompt some core, fundamental changes in the business models …”

People are still buying music CDs off-line, of course.

What’s interesting is that the decline in online music sales far exceeds the decline in overall shipments of recorded music as recently reported by PricewaterhouseCoopers for the RIAA.

While the RIAA itself reported in August that total U.S. music shipments dropped seven percent in the first half of 2002 versus the first half of 2001 ($5.93 billion versus $5.53 billion), comScore’s data shows that online sales of music fell 20 percent (from $531 million to $424 million) over the same period.

“While a host of factors inevitably impact consumer behavior, the greater sales decline online as reported by comScore would suggest that Internet file-swapping and CD-burning are having a severe negative impact on music sales among Internet users,” said Peter Daboll, division president of comScore Media Metrix, a division of comScore Networks.

After Napster went paws up, comScore data shows, U.S. consumers flocked to numerous alternatives, including Kazaa and Morpheus.

Each of the latter two increased its average monthly U.S. home user base from less than one million in the second quarter of 2001 to 4.6 million and 7.1 million, respectively, in the first quarter of 2002. By the close of the third quarter of 2002, Kazaa had built an impressive following of 9.4 million average monthly U.S. home users.

Finally, a separate analysis of the U.S. Home and Work audience revealed that six of the leading file-sharing applications collectively were used by 14 million consumers in September 2002.

“For the first time in more than three decades, the music industry is being forced to think creatively about its distribution model and the way it makes money from promoting artists,” Vonder Haar said. “Digital distribution is putting pressure on the industry’s core focus on selling pre-recorded music on CDs. The record labels need to be thinking more creatively about ways they can generate profits from the celebrities they help create.”

Meanwhile the “big five” recording companies, working through the RIAA, may be moving toward filing copyright lawsuits that would target the highest volume song providers within services which allow people to grab songs without paying artists or labels.

While major victories against Napster and MP3.com have won the RIAA much press, they have done little to stop other players from quickly replacing the ousted sites. KaZaA and MusicCity (the creator of Morpheus) have both logged over 90 million downloads through download.com.