Digital market offers hope as music sales slow

A customer checks out Music Store (on a screen) with Apple iTunes at an Apple store in Tokyo in this August 25, 2006 file photo.

DENVER (Billboard) - Ever since Apple's iTunes store launched in 2003, the digital music market has received an annual Christmas gift in the form of a sales boost, as consumers unwrap new iPods and gift cards for the holidays.

This year, though, as recession ends a year of relatively sluggish growth in sales of digital music, some executives are wondering if they might get a lump of coal instead.

Even before the credit crisis hit this fall, analysts predicted holiday growth would be modest. So far this year (through the week ending November 16), digital album sales are up 30 percent, according to Nielsen SoundScan, and sales of singles have climbed 28.8 percent. That sounds impressive, but it's less than last year's gains: 56 percent for albums and 46.5 percent for singles.

A merry Christmas season could turn this situation around. The number of new players that come into the market has made December just as important for digital music as it is for CD sales. Through November 2007, retailers sold an average of 4 million digital albums and 68 million tracks per month in 2007. In December, they sold 5.1 million and 93.5 million, respectively.

This year, some analysts are concerned about sales of new iPods and downloadable gift cards. Fourth-quarter iPod shipments could fall by about 15 percent from last year, according to Piper Jaffray's Gene Munster. And budget MP3 players might not make up the difference: Overall consumer electronics spending is down 22.1 percent for the first two weeks of November, according to MasterCard Advisors.

Overall gift card sales could fall by 5.6 percent, according to the National Retail Federation, which doesn't break down data by category. That would hurt digital retailers. NPD Group estimates that about 40 percent of iTunes track purchases in first-quarter 2008 were made with gift cards.

There is some good news. Digital growth is slowing partly because its consumer base is growing; digital downloads now account for about 10 percent of U.S. music sales, according to NPD Group.

And retailers have come up with new ways to promote digital music as a gift idea. iTunes now allows users to send gift cards through e-mail or directly buy songs as gifts that the recipient can download through a link.

"Overall economic pressure may keep the media wallet share tighter this year than last," Gartner analyst Mike McGuire said, "but the tools are there now to let people make that digital look first, rather than heading to the store to get the physical disc. A $10 download card for iTunes or Amazon is a nice, cost-effective present for a lot of people."

Reuters/Billboard