Music Industry in Five Years

No huge surprises here: The U.S. music market is expected to shrink over the next five years from $10.2 billion to $9.8 billion. Digital music sales are expected to grow from 18 percent to 41 percent of the total (as physical product shrinks from 64 percent to 40 percent of the market). Sonal Gandhi, the lead analyst on the study, spoke with Rolling Stone about her findings.

Youre predicting that digital music will grow from 18 to 41 percent of total sales in 5 years. That seems a little low. Last week Atlantic was already claiming that 51 percent of its revenue is already coming from digital.

Sonal Gandhi: We built this market in the fall of this year and the Atlantic story just came out last week. The Atlantic story may be an exception. The market has suddenly gone into a recession and were hearing stories today how CD sales are not going as expected. We tend to be a little more conservative on our forecasts, but I think were going to stick with this number for now.

The flip side to that is that physical format, mostly CDs, will shrink from 64 to 40 percent of the market. So digital and physical product according to your predictions will make up the same percentage of the marketplace in 2013.

Sonal Gandhi:Yeah, and the missing portion is the ringtones and ringbacks and we dont think thats a growth market either. Ringtones have been more or less flat and ringbacks are small.

When does the market for portable MP3 players become totally saturated?

I think were seeing it might flatten out towards the end of the five year period.

There was a surprisingly significant bump in vinyl sales this year over last.

Vinyl is such a small chunk that it doesnt really make a big dent in the overall number.

Whats the biggest surprise in these findings?

Two things are happening in terms of digital music: One is that people are buying MP3 players and the growth is still substantial. Even though we think its going to flatten, its still growing. Not everybody who has an MP3 player necessarily buys digital downloads, but we have seen that that number has grown and we predict that number will continue to grow. Now, people who were early adopters of MP3 players were also heavy music fans, so they tend to spend more on digital downloads. As more of the mass market starts to own MP3 players and become digital music buyers, theyre not going to spend as much on digital downloads as the early adopters, so the average spending on digital downloads is either going to stay the same or not grow much.

So its a wash. There was some talk that that the 99 cent song price may be renegotiated along a sliding scale depending on how popular the song is.

Pricing is going to play a bigger role going forward because Amazon is coming out with all these variable pricing models. People are still locked into the iPod and iTunes mentally. They have an iPod and it works well with iTunes and thats how theyre used to buying. With variable pricing, Amazon can steal customers away from iTunes. And it will be those savvy music fans that know theyre getting a better deal there.