Downloads set to overtake CDs

Digital music is set to overtake sales of CD, vinyl and DVD music for the first time in Australia early next year.

This follows the path of the US and the UK, where music downloads overtook physical sales of singles and albums for the first time in January for the US and May for the UK, according to the Australian Financial Review (AFR).

Sales of physical music from CDs, DVDs, vinyl and cassettes fell from $484 million in 2006, to $242 million in 2011, while digital music sales rose fivefold to $141 million. The AFR suggests that downloads are expected to rise 30% this year, to overtake physical sales.

Traditional retailers which sell physical music, like JB Hi-Fi Limited (ASX: JBH), Big W – owned by Woolworths Limited (ASX: WOW), Kmart – owned by Wesfarmers Limited (ASX: WES), and Myer Holdings Limited (ASX: MYR) will most likely continue to offer CDs and DVDs, but it’s likely to become a niche product, rather than stay as a mainstream offering. Many retailers have already dropped CDs from their product lines, including Harvey Norman Holdings Limited (ASX: HVN), which still sells music accessories such as iPods and headphones.

Of course, digital downloads now face their own potential demise – from music streaming services. According to the AFR, 10 streaming music services have been launched in the last 12 months, including JB Hi-Fi’s NOW, Rdio, Deezer and current market- leader Spotify. Streaming music generally offers access to music for free, but includes ads, or users can pay a subscription fee to access as much ad-free music as they want.

Apple’s iTunes dominates music downloads with an estimated 90% market share, but has yet to respond to the music streaming threat, with its own streaming service, although rumours abound that it’s not far off.

Chris Johnson, manager at the Australian Music Radio Airplay Project says that its likely the new ‘all-you-can-eat’ subscription streaming service will decimate the need to buy music altogether. Artists and music creators face a tough time trying to make a living in future, and may currently be at the mercy of the streaming companies. Some artists have kept their music off streaming services, in fear of exactly that happening.

Foolish takeaway

Evolution never really ceases, and we could see streaming music itself threatened as a viable business within years. Digital music – whether streamed or downloaded – is likely to become the mainstream way of consuming music, although there will likely always be a niche market for CDs and DVDs, just as there is for vinyl.

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Motley Fool writer/analyst Mike King owns shares in JB Hi-Fi and Woolworths. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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