Music business suffers a long, cold winter

By Ed Christman

NEW YORK (Billboard) - While it is no shock that CD sales plummeted in the first quarter, what may be more surprising is who and what are leading that decline.

First things first: Overall album sales for the January 1-April 2 period are down 16.6% to 117.1 million units, led -- or perhaps misled -- by a 20.5% decline in CD album sales.

Industry executives attribute the decline to a weak release schedule, the consumer's loss of confidence in the CD and a reduction in store space for the format.

Certainly, the last point is documentable. Between first-quarter 2006 and now, several key retailers have disappeared. FYE shuttered 131 stores in January, and Tower Records liquidated 89 superstores in December. Musicland also closed 500 stores beginning in January 2006, so many of those outlets -- and their going-out-of-business sales -- contributed to first-quarter 2006.

"We are seeing a customer dislocation," says Mike Dreese, CEO of Newbury Comics, a 27-store chain based in New England. "A lot of people are confused about where they shop, and it's changing their habits ... it takes a while for people to find new stores."

Digital track sales, although they are still growing, could not pick up the slack. More than 280 million digital tracks were sold, outpacing album sales by more than 100 million units, according to Nielsen SoundScan. When those digital tracks are converted to track equivalences (10 tracks counting as one album sale), unit album sales were still down 10.3%.

Digital sales growth is slowing from last year, when tracks were up 87% and digital albums up 144% at the end of 2006's first quarter. At the end of first-quarter 2007, digital track sales were up 51.9%; digital album sales, which total 11.5 million units, were up 56%. But as a percentage of album sales, digital albums are nearly 10% now, versus the 5.2% they were at the end of first-quarter 2006.

Meanwhile, two tracks topped the million-unit milestone: Fall Out Boy's "This Ain't a Scene, It's an Arms Race" and Gwen Stefani's "The Sweet Escape." The top-selling digital download at the end of first-quarter 2006 was James Blunt's "You're Beautiful," which stood at 714,000 scans.

IT'S ROUGH TO BE A WAL-MART IN NASHVILLE

For the first time since the early days of the industry, such mass merchants as Wal-Mart, Target and Kmart have surpassed chains, which include such retailers as Trans World, Best Buy, Barnes & Noble, Newbury Comics and Gallery of Sound.

The discount department stores scanned 44.8 million album copies versus the 44.5 million units that chains sold.

But in a subtle change, for the first time in recent years, mass merchants, with a 17.8% decline, didn't turn in a better performance than the overall U.S. market's 16.6% decline.

Meanwhile, the independent store-sector seems to have stabilized, after shrinking faster than the overall marketplace for the last five years. In the first quarter, indie stores declined 14.5% to 8 million units. In contrast, at the end of first-quarter 2006 when total U.S. album sales declined 5%, indie stores were down 18.5%.

Nontraditional sales -- which include digital album downloads, CD sales through online stores, retailers like Starbucks, TV 800-phone sales and concert hall sales -- continue to be the star performer, with sales up 29.2% to 19.8 million units.

Despite worries about the reduction in store space devoted to CDs, catalog sales, down 14.6% to 47.5 million units, continue to show more strength than current album sales, which are down 18.9% to 69.6 million.