Music Industry - problem from the Internet


Streaming music sites with freely accessible content are being used by a growing number of listeners as a substitute for buying music.

Five years ago, San Francisco-based graphic designer Gitamba Saila-Ngita spent around $100 a month buying CDs and digital downloads to fill his iPod. Now, he spends less than $10 each month on tunes. The reason? He gets almost all of his music from services like Imeem and (CBS) where he can listen to pretty much anything over the Web for free or at minimal cost. "And I absolutely listen to more music than I used to," says the 23-year-old. "I pretty much have music playing all the time. It's because I can access so much of it, however I want."

The music industry has a new Internet problem. A decade ago, the major record labels began to worry about online piracy, in which people illegally swapped music over peer-to-peer networks like Napster (BBY) and later LimeWire. Partly in response to the piracy threat and partly due to sliding CD sales, music companies began to experiment with licensing their records to new online services.

The idea was that services like Imeem,, and Pandora would let people listen to music on PCs, mobile devices, and home stereos, while collecting small fees and advertising revenue that the services would share with labels and artists. Music fans would be discouraged from stealing tunes, and the major labelsóWarner Music Group (WMG), Sony Music, Universal Music, and EMIómight even get a sales boost as listeners discovered new kinds of music.

But it hasn't worked out that way. Researchers and industry consultants say online music sites are being used by a growing number of listeners as a substitute for purchasing music, rather than serving as a catalyst for more purchases. Saila-Ngita's experience shows that the sites allow music fans to spend much less money than in the past. "Most of this is substitution. People go to [the Web] instead of buying records," says Jay Rosenthal, senior vice-president and general counsel for the National Music Publishers' Assn., a Washington (D.C.)-based trade group that represents publishers of songwriters and composers.

Overall music sales have continued their years-long slide. Total industry sales were about $10 billion last year, down from $14 billion in 2000, according to the Recording Industry Association of America. Revenues from digital download services like Apple iTunes (AAPL) and Amazon MP3 (AMZN) are still growing strong, but they're not generating enough revenue to make up for the sharp decline in CD sales. Overall spending on music is forecast to shrink 4% through 2013, according to a recent report by Forrester Research (FORR).

The new world of music looks very different from the old. With the new Web, services' listeners don't put CDs into a stereo or download tunes to their iPod. Instead, their music sits on a server somewhere else, waiting to be played from a computer or any other Net-connected device.


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