Music sales weaken in first half

The decline in music industry revenues accelerated in the first half of 2006, defying record executives’ hopes of returning to growth this year and raising fresh questions about whether they are winning the fight against piracy and illegal downloads.

Global music sales fell by 4 per cent in the first half to $8.4bn in trade values, or $13.7bn at the retail level, according to the IFPI, the recording industry’s international trade association. In 2005, the industry declined by 3 per cent.

Revenues from physical formats, such as compact discs and music videos, were down 10 per cent worldwide, compared with the 6.7 per cent decline seen in the previous full year.

CD sales and prices have been hard hit by the ready availability of pirated physical copies, illegal peer-to-peer services and the fact that the growing market for digital downloads has allowed many consumers to buy single tracks rather than entire albums.

The legal digital music market continued to accelerate, rising 106 per cent to $945m, or 11 per cent of the total recorded music market - double the share it claimed at the end of 2005. In the US, where digital sales increased by 84 per cent, online and mobile music now accounts for 18 per cent of the total market.

Some industry executives had voiced hopes that this rapid growth in downloads, mobile ringtones and subscription revenues would compensate for the decline in physical formats.

John Kennedy, chairman of the IFPI, said in March: “It is encouraging that the markets with the strongest digital sales are also generally the best performing markets overall. In Japan digital has already made up for the decline in physical sales, and other markets should go this way.”

The pressure on traditional sources of revenue has forced the major music companies to look at new ways of refreshing their physical products and new outlets for their content.

Universal Music has introduced new packaging and a three-tier pricing system across Europe, and many groups have begun to offer CDs and DVDs with bonus material to differentiate physical products from digital offerings at download sites such as Apple’s iTunes.

In an effort to extract more value from their music video libraries, Warner Music, Universal and Sony BMG have signed deals with YouTube, the video sharing site, to supply videos in exchange for a fee and a share of associated advertising revenues.

The industry has won several battles against pirate music sites, but an IFPI report in July estimated that 20bn songs were downloaded illegally in 2005 - or 40 for every track that was downloaded legally.

The IFPI figures were released at the start of the intensely-competitive fourth quarter, when sales are typically boosted around Christmas. Last year, the recording industry made almost 60 per cent of its revenues in the second half.