Wed, Jan 25, 2006 - Page 11 News List

Digital music takes off, but profitability at risk

LASTING DAMAGE With consumers now willing to pay a higher price for a ringtone than for a record, many are concerned that digital music sales are denting profits


Apple uses it to sell iPods. Vodafone uses it to sell broadband airtime. Starbucks uses it to encourage customers to linger longer, and consider a second Frappuccino.

Digital music finally took off last year, according to data published ahead of this week's Midem music trade show in Cannes, while lawsuits kept illegal file-sharing in check.

But for record companies, the growth of legitimate downloads and the partial victory against piracy have come at a price. Many in the industry are concerned that the scramble to license out catalog for digital sales has done lasting damage to profitability.

"Music has become a disposable item," said Nicholas Firth, chairman and CEO of BMG Music Publishing, a division of Bertelsmann AG. "For many people it's a traffic builder."

Firth, addressing Midem delegates, said the digital consumer "is now willing to pay a higher price for a ringtone than they are for a record."

As music goes digital, more and more big-name firms want to sell it -- mainly as a way of boosting profit on their other core activities.

Starbucks Corp has introduced CD burning stations at coffeehouses in five US cities and is mulling a wider rollout after finding that customers stay longer when given the opportunity to download music at about a dollar a track.

"That experience can go anywhere from 20 to 30 minutes as they continue to browse and listen and make their music selections," said Ken Lombard, who heads Starbucks' entertainment division.

Digital music sales tripled to US$1.1 billion last year, according to industry trade body IFPI, but failed to offset an estimated 6 percent decline in CD sales.

Overall music sales fell about 2 percent, according to a forecast based on data from three-quarters of the market. Apple Computer Inc's iTunes Music Store continued to dominate the download market.

Once hailed as the industry's savior, iTunes is increasingly seen as part of the problem.

"I'm hearing that the artists aren't happy, the publishers aren't happy. Someone other than Apple needs to be happy for this industry to grow," said Amit Shafrir, president of AOL's premium services arm.

AOL, a unit of Time Warner Inc, is launching a music site allowing Internet users to download all the tracks they want for a monthly fee. But take-up of subscription-based services has so far been limited; they accounted for just 8 percent of digital music sales last year.

Apple's one-size-fits-all pricing in the US and Euro area has set the benchmark too low for the comfort of record companies, which have tried and failed to break the iTunes stranglehold.

Music majors are pushing for variable pricing on iTunes, allowing them to charge more for sought-after new hits than for older tracks. But Apple boss Steve Jobs has dismissed their pleas, saying in September that the record companies were "getting a little greedy."

Album sales have declined steadily as consumers "cherry-pick" individual tracks online, said Phil Leigh of Inside Digital Media, a US market research firm.

"When you can buy just the songs you like in a digital format, you don't have to buy the album," he said.

Senior music executives credit Apple for halting the growth in global piracy -- but often through gritted teeth.

"For the time being we all must work with Apple and make the most of iTunes," said Eric Nicoli, chairman of EMI Group PLC, the world's No. 3 record company.

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