[Ecommerce] "digital optimism crashing on itself"

[Manon Ress]

http://www.bloomberg.com/apps/news?pid=email_us&refer=&sid=aHP5Ko1pozM0

Apple's IPod Success Isn't Sweet Music for Record Company Sales

Nov. 2 (Bloomberg) -- Carl Giannone bought a few songs on line after
buying an Apple Computer Inc. iPod in May. Then the equities trader
and ``hippie rock'' enthusiast filled the digital music player with
tracks from his own compact discs.

``I probably downloaded 10 songs immediately and then maybe once a
month since then,'' says Giannone, 28, a Grateful Dead and Phish fan
who works at PTG Capital LLC in New York.

Giannone is part of a wider trend. Digital music sales in the U.S.,
the world's biggest market, have hardly budged in the past five
months. They almost tripled to 6.6 million downloads a week in the
year through May, and were at 6.7 million in the week ended Oct. 23,
according to Nielsen SoundScan, a unit of Dutch media company VNU NV.

The iPod, with more than 28.2 million sold, isn't providing the
panacea that the music industry seeks. EMI Group Plc Chairman Eric
Nicoli forecast in May that digital sales would help revive the $34
billion recorded music market. For now, they're unlikely to offset
falling CD sales that are causing global revenue to shrink for a
sixth straight year.

``Digital optimism seems to be crashing in on itself,'' says Simon
Baker, a media analyst at SG Securities in London, who has a ``sell''
rating on shares of EMI, the world's third- largest music company.
``Downloads in the U.S. have alarmingly plateaued. This has
devastating implications for predictions that digital sales would
grow exponentially.''

Vinyl to Digital

The download numbers suggest that the iPod's iconic success, which
has driven up Cupertino, California-based Apple's share price almost
sixfold since 2001, isn't translating into new music sales the way
the evolution from vinyl albums to cassettes and then CDs did. For
many users, the portable devices are just another way of stocking and
listening to music, not an incentive to buy new music.

Apple's iTunes Music Store, with a catalog of 2 million titles on
sale for 99 cents apiece, and rival systems are download services
that let customers buy music and create ``libraries'' into which they
can transfer music from CDs.

``I've still never bought a download,'' says Eneka Iriondo- Coysh,
21, a graphic-design student in London who has owned a 10,000 song-
capacity iPod for more than two years. ``I do it all from my CDs and
my friends' CDs,'' mostly hip-hop and soul.

In the U.S., annual downloads per iPod dropped from 25 to 15 in the
last year, New York-based Fulcrum Global Partners LLC said in an Oct.
17 report. Global CD sales fell 6.7 percent to $12.4 billion in the
first half of 2005, according to the London-based International
Federation of the Phonographic Industry, or IFPI.

Apple Soars

``The evidence we've seen so far clearly points to the fact that
digital downloads are not really additive,'' says Wassili Papas, a
fund manager at Union Investment GmbH in Frankfurt, which oversees
about $36 billion of equities, including EMI shares. He says he's
keeping EMI stock to benefit from any gains if the London-based
company seeks to merge with a competitor.

Music stocks have declined while Apple soared. Apple shares have
climbed to $57.50 in New York from $9.50 in October 2001, when the
iPod went on sale. Fiscal fourth-quarter net income at Apple, which
also makes Macintosh computers, rose to $430 million from $106
million a year earlier, as it sold 6.45 million iPods, the company
said Oct. 12. Revenue from iTunes Music Store and iPod accessories
accounted for just $265 million of Apple's $3.68 billion in sales in
the period.

The shares of EMI, whose roster includes Coldplay and The Rolling
Stones, have dropped 20 percent this year to 212 pence in London.
Warner Music Group Corp. Chief Executive Officer Edgar Bronfman Jr.
has seen his company's stock fall to $15.47, below its May initial
public offering price of $17.

Universal and Warner Music

EMI returned to profit, with net income of 56.3 million pounds ($99.4
million), in the year ended March 31 after shedding jobs to cut
costs. The company reported a net loss of 71.6 million pounds a year
earlier. New York-based Warner Music, with Madonna and rapper Mike
Jones, had a third-quarter operating loss of $179 million on costs
related to the IPO.

The two companies rank behind Universal Music Group, owned by Paris-
based Vivendi Universal SA; and Sony BMG, a venture of Germany's
Bertelsmann AG and Tokyo-based Sony Corp. Universal Music Group and
Sony BMG aren't publicly traded.

The leveling off of U.S. downloads shouldn't cause alarm given the
ample digital opportunities elsewhere in the world from song
downloads to ring tones for mobile phones, says John Kennedy, 52,
head of the IFPI. The group represents the major labels and hundreds
of independent music groups. It forecast in a January report that the
online market would take off in 2005.

``We're still optimistic that figures for the year will show a
doubling over 2004 or even a tripling,'' Kennedy says, referring to
overall digital sales. Music sales always vary sharply by geography
and season, so it's dangerous to read too much into a short period of
time in the U.S., he says.

Blip or Trend?

The weekly U.S. song download figures don't include digital revenue
through subscription services such as Los Angeles-based Napster Inc.
that in effect let users rent music for a monthly fee, IFPI says.

In addition to downloaded tracks, U.S. consumers downloaded 11.3
million albums this year through mid-October, out of 436.1 million
albums sold, says White Plains, New York-based Nielsen SoundScan.

``It's a blip, not a trend,'' Paul Burger, 50, president of London
music-management agency Soho Artists and the former head of Sony
Music in Europe, says of the leveling off of U.S. downloads.

That belief has music companies, led by Warner Music, fighting to
boost the 99-cent retail price on their most popular songs downloaded
on Apple's iTunes Music Store.

The music labels seek pricing that varies with demand for a song.
They get about 65 cents per song from iTunes, Merrill Lynch & Co.
analysts said in a June report. Given current profit margins, selling
10 digital songs will reduce record company profit by 20 percent
compared with selling a CD at an estimated $10 wholesale price,
according to the report.

`Greedy'

``The market ought to be able to decide, not a single retailer,''
Warner Music's Bronfman, 50, said in September at a Goldman Sachs
Group Inc. conference in New York. Days earlier, Apple CEO Steve
Jobs, 50, said at a Paris news conference that music companies were
being ``greedy'' by seeking more for downloaded tracks, adding that
it would only encourage piracy.

``There will be variable pricing, multitier pricing,'' Universal
Music CEO Doug Morris, 66, said Oct. 6 at a meeting of financial
analysts in London. ``The issue is going to be when and who blinks
first.''

More than 600 million songs have been sold through iTunes since Apple
started the online music site in April 2003, Jobs said in September.
The company has more than 10 million account holders, and sells 1.8
million songs a day globally. Apple last month began selling more
than 2,000 videos, which can be watched on a new iPod device unveiled
on Oct. 12.

Under Siege

``There's been a lot of download activity from what's known as the
early adopters,'' says Russ Crupnick, a music industry analyst at
Port Washington, New York-based market-research firm NPD Group Inc.
``The challenge is: how do you maintain this? The industry has to do
a stronger job of reaching out to more mainstream consumers.''

Downloads may get a boost from Christmas sales of iPods, as occurred
last year, he says.

The global music industry has been under siege for years amid
declining sales. Record companies suffered from piracy, including
$4.6 billion in lost annual revenue because of bootlegged CDs. At the
same time, music faces new competition for consumer time and money
from video games, DVDs and mobile phones. At traditional ``record
stores,'' DVDs and games are taking an increasing amount of shelf
space, squeezing out CDs.

Music companies have waged court battles to try to stop piracy, and
earlier this year won a U.S. Supreme Court ruling that file-sharing
services can be held liable if they induce people to infringe on
copyrighted material.

In the digital era, the ``unbundling'' of CDs through the purchase of
individual tracks lets consumers pay far less to get a few of their
favorite songs rather than buying an entire album.

``The issue of downloads cannibalizing the album is a perfectly valid
concern,'' says Tim Rees, a fund manager at Insight Investment
Management in London, which oversees about $140 billion, including
EMI shares.

Giannone, the equities trader in New York, says he has only
downloaded individual songs he heard at a bar or other public place.
``I certainly didn't want the whole album.''

To contact the reporter on this story:
Charles Goldsmith in London at  cgoldsmith3@bloomberg.net.

Last Updated: November 1, 2005 19:00 EST

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Manon Anne Ress
manon.ress@cptech.org,
www.cptech.org

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