Study Finds Digital Opportunities for Music Industry

Posted on January 7, 2005

Based on the latest data from The NPD Group, which was presented at the Music 2.0 conference in Los Angeles, digital music continues to represent a prime opportunity for the music industry; however challenges remain in both attracting and maintaining customers. According to the most recent NPD information, 62 percent of Internet-enabled households currently have digital music files saved on their PCs.

"Nearly two-thirds of U.S. households are now personally familiar with digital music," said Isaac Josephson, senior account manager of The NPD Group. "That means that among regular internet users who have been online during the past 30 days there's a potential audience of 43 million domestic households with at least some level of digital music savvy. This represents big opportunity for digital music retailers - especially if they can find effective ways to convert those using free P2P services."

The challenge for paid digital music services is to build trial rates, which are currently running at a monthly rate of two percent of U.S. households with Internet access. In addition, paid digital music services should be looking to increase conversion rates, which currently stand at about 20 percent -- nearly half of the conversion rate of P2P services. Note: NPD defines "conversion" as a new user who tries a particular service and goes on to become a regular user of that service.

"Eight percent of P2P users have tried a legal service: that's four times the trial rate of the average Internet user," Josephson said. "The hitch is that those who did try legal services continued to use P2P services by a two-to-one margin. The legal services need to convincingly articulate the key features and consumer benefits against free P2P alternatives."

When it comes to file sharing and digital music, the industry's focus is trained on younger demographics; however, NPD found that teens are somewhat less drawn to legal services than are older consumers. Teens age 13 to 17 represent a 15 percent share of physical music (CD) purchases and 21 percent of P2P usage but only 12 percent of legal service users. By contrast adults age 26 to 35 represent 21 percent of all CD sales, 19 percent of P2P users and a strong 25 percent of legal service users.

By comparison to CD sales, in which sales of new releases are the most crucial marketing component, catalog titles that were released more than 18 months prior are a key point of focus for consumers looking to purchase digital music. Sixty-seven percent of the content acquired from P2P is catalog, versus 33 percent for new releases. Similarly 63 percent of the content acquired via paid music services were catalog titles, versus 37 percent for new releases.

"Catalog sales are a much larger part of digital music than they are in the physical-music realm," Josephson said, "For some consumers the numbers suggest that digital music is filling a content void created by the limited shelf space available to brick-and-mortar CD retailers. For others it's a way to build a more robust digital collection of their favorite music one track at a time."

The music industry has lingering concerns that fewer restrictions on digital music will encourage piracy; however, those fears have not been borne out by NPD's most recent research. While the industry has focused on limiting CD burning and digital file portability, P2P users -- who have no restrictions on either of those features -- actually burn fewer CDs and upload to portable music players less often than do users of paid digital download services.

Additionally, NPD's research challenges the assumption that pricing digital music offerings competitively will reduce the perceived value of physical CDs. Only six percent of legally downloaded songs were played multiple times in the first two months after they were purchased and just eight percent were uploaded to a portable music player. By comparison, nearly 80 percent CDs get constant attention in the first two months after they are purchased.

"The question is whether consumers hold the average digital music file to a different value standard than they do for physical music," Josephson said. "Many consumers tell us that they buy physical CD's for their favorite artists. These have a high value in consumer's minds. If consumers are using digital, in part, to build collections and sample new music, then the digital purchases may have an entirely different consumer value. As such, the music industry might want to come at consumers with a different value proposition for digital music vis-a-vis CDs."