April 4, 2008 / 12:42 AM / 12 years ago

UPDATE 2-Downloads king as iTunes tops U.S. music retailer

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By Adam Tanner and Scott Hillis

SAN FRANCISCO, April 3 (Reuters) - Online music purchasing marked a symbolic milestone when Apple Inc (AAPL.O) announced on Thursday that its iTunes music store had surpassed Wal-Mart Stores Inc (WMT.N) to become the largest U.S. music retailer.

Industry analysts have long expected downloaded music to eventually replace the compact disc, but said the significance of Web delivery overtaking physical goods in the music business is a harbinger for many other industries. Books and videos are rapidly moving in the same direction.

“People have long talked about the shift to digital music sales but this seems to be a symbol it is actually happening,” said Steve Knopper, a Rolling Stone magazine music business reporter who is writing a book on the music industry in the digital age.

Apple’s acknowledgment of its growing market share, came on the same day that News Corp’s NWSa.N MySpace social networking site said it had formed an online music venture with three record labels, posing a new challenge to iTunes.

Apple said its announcement was based on consumer data collected in January and February by market research firm NPD that counted 12 songs being equal to one CD.

“It underscores a very important trend in the industry,” said Michael Gartenberg, vice president and research director at Jupiter Research. “It wasn’t that long ago that Apple was proud of the fact that they were No. 4 and rising and (then) No. 3 and No. 2.”

In February, NPD had said iTunes overtook major retailers Best Buy Co (BBY.N) and Target Corp (TGT.N) in 2007 to become the No. 2 U.S. music seller.

Apple, which makes iPod media players, Macintosh computers and the iPhone, said iTunes had attracted 50 million customers since its online store opened five years ago and that these consumers have collectively purchased 4 billion songs.

“Now, everyone is going to be looking at how to take a piece of that away from Apple,” Gartenberg said.

The rise of iTunes also has brought a shift in music purchasing behavior in which many consumers now buy individual songs rather than whole albums, undercutting traditional music industry pricing, analysts have noted.

Cheap individual downloads are the latest challenge to a recorded music industry still struggling to fight a wave of digital piracy, especially among younger generations. This has led to a historic decline in sales of CDs, which could soon join vinyl and 8-track tapes as vintage recording formats.

“It is not good for their profit margins because they don’t make much off of iTunes at all,” Knopper said of music labels. “They used to sell, eight to 10 years ago, and even to a certain extent today, $18 CDs. They had huge margins on these.”

Shares in Apple rose 2.8 percent to close at $151.61 amid a 1.9 percent gain in the broader Nasdaq market. The stock is about 25 percent below its all-time high hit in December, but has risen 25 percent in the last month amid signs consumer worries over the economy have not dampened Apple’s sales. (Editing by Eric Auchard and Carol Bishopric)

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