Digital music to make up 41 percent of sales by 2013

CDs are still selling, but a report out yesterday from Jupiter Research says that the long slow decline isn't as slow as previously thought. But what will make up for the drop in shiny-disk sales?

According to the study, digital downloads will fill the void -- but not entirely. The Jupiter survey predicts that overall, the music market will shrink by about 0.8% by 2013, to $9.8 billion in sales, with the percentage of sales of "offline physical format" forms (CDs, albums, etc.) plummeting from a 64% share of sales down to 40%. That's a combined annual growth rate (CAGR) of -8.7% -- a worse number than Jupiter predicted last time they looked at the market (-7.1%).

The percentage of sales accounted for by digital-music formats will reach 41% by 2013, Jupiter says -- the first year, it is thought, where music in digital-file form will outsell those shiny, scratchable formats.

Then as now, downloads from services such as iTunes, Amazon, and their ilk will lead the digital charge -- in fact, downloads will be a bigger deal than even by then, with projected sales of $3.27 billion. That's up from a projected $1.496 billion in 2007, for a very healthy CAGR of 24%. (A note for file sharers: This story isn't about you, though the study does note that 2% of the paid-download buyers they surveyed acknowledged sharing files. Whether you personally would respond truthfully to that question if asked by a pollster, well...)

In contrast, subscription-based models such as those currently used by Rhapsody, Live365, and their competitors will have increased revenue -- about double between then and now, says Jupiter -- but represent only around $508 million in sales. That's a pleasant CAGR of 16%, but proportionally a much smaller piece of the market.

Subscription owners tend to love their tunes, spending more on music per year than downloaders or physical-media folk. So why do their numbers remain, as the survey puts it, "marginal?" The survey suggests that though subscribers spend more, tend more frequently to regard themselves as "music influencers," and love the impulse buys so useful to sales numbers, subscriptions must compete with the appeal of over-the-air downloading to phones and other devices. Upcoming options such as Nokia's "Comes With Music" phone plan are also expected to affect this segment.

Gear makes a difference, and gear (and our perceptions of it) will change. For instance, listening to music on one's mobile phone is more popular among teens then adults (though iPhone users bust the curve on that front, to no one's surprise). The study showed that as the population ages into familiarity with music-capable phones, more will take advantage of that option, eventually flattening ownership for dedicated portable music players at about 41% of the population.

Finally, Jupiter's analysts advise the music industry to stay its current tech-friend course.

"Over the last year, record labels and publishers have shown an increased willingness to work with new digital music models to supplement the loss of revenue from a shrinking market," the study notes, enabling new revenue streams such as advertising and streaming at sites like Lala.com. "Labels and publishers should continue this wise strategy and resolve remaining issues with digital music providers...to develop mutually beneficial terms."

The study is based on a survey of 2,127 individuals polled in June 2008 and selected from NPD Group US' online consumer panel. The survey data are stated by the pollster and Jupiter Research to be an accurate representation of the general US population +/-3%.