NEW YORK-Digital distribution is coming, and it will be a significant-and generally positive-sales force in the U.S. music industry. But don't look for it to arrive full-grown next week-or next year, or the next several, even.
Instead, expect to see continued strong growth in the shorter term-the period through 2003-from the sale of physical music goods via the Internet, as the fast-emerging download sector gingerly tests its young legs against such near-term hurdles as the slow rollout of significant amounts of major-label product online; limited penetration of digital playback devices; lack of broadband connections; and the enduring appeal of "packaged" CDs.
That's the bottom line in a forthcoming music industry report from Jupiter Communications, which forecasts that only 3% of total online users in the U.S. will purchase digitally downloaded music in 2003, representing digital sales of $147 million- only 5.7% of total online music sales that year.
Nonetheless, the slice of the U.S. music business that online music sales-of mail-order and downloaded music-will claim by 2003 will be a plump 14% of an $18.4 billion market, according to the report. By contrast, online music sales represented only some 1.1% of the $13.7 billion in total U.S. recorded music sales in 1998, according to Jupiter.
"GREAT MOMENTUM'
"There's so much great momentum behind [the digital download] space right now that when you look at the bare-bones numbers of actual revenues that are projected, everybody's gut reaction is, "Well, they're crazy, that's too low,' " says Mark Mooradian, director of consumer content strategies at Jupiter and the author of the report that will be presented Monday (19) during the Plug-In conference in New York.
"But while this is a tremendous and exciting time, and the attention to downloading is certainly warranted, people have to remember that media attention does not amount to real revenues being generated right now.
"Jupiter has been the first to say that digital distribution is really important and there are a thousand and one good reasons to be there right now," Mooradian adds. "It's just that generating substantial revenues in the next couple of years is not one of them."
THE MAJORS ARE KEY
The availability of major-label product has long been seen as key to unlocking the revenue potential of the online distribution realm-people can't buy what's not for sale, even if they can often "acquire" it anyway-and thus the rash of announcements this year regarding majors' tests of online music-distribution models has sparked optimism that the floodgates are about to open.
"The play of the majors here is really important, and what kind of market exists with digital distribution is going to be highly dependent on how available they make their music," says Mooradian.
While security concerns have kept the Goliaths off of the digital playing field, the proven might of the unsecured MP3 has kick-started their efforts to develop secure means of distribution, including the inter-industry Secure Digital Music Initiative, which has just unveiled its first specification, for portable players (Billboard, July 17).
Despite serious strides toward making catalogs available for downloading, the Jupiter report forecasts that concerns over piracy and security will result in the vast majority of catalog not being available for downloading until 2002-at which time Jupiter predicts significant acceleration of the market.
TAKING IT WITH YOU
Also key to creation of mass-market digital distribution of music, according to Jupiter, is a viable means for consumers to enjoy such music away from their computers, or the portability factor.
Jupiter estimates 30,000 digital playback devices-such as Diamond Multimedia's Rio-were sold in the U.S. in 1998 and predicts the installed base will grow to 500,000 by the end of '99 and then surge to 5.2 million by the end of 2003.
But while the growth rate will be strong, the mass-market peak will still remain out of reach by 2003, Mooradian says.
"Any time you are launching a consumer electronics device from scratch, it is going to take a certain number of years for it to establish and to build a real customer base," he says.
Factors slowing sales of such devices in the near term, according to Jupiter, include a still-emerging online music listening population; lack of an "addressable" computer-needed for portable use-among such key music-buying demos as children and teens (who may have access only at school or work); limited playback time in the units; and lack of music availability.
Though they are less sexy at the moment than their portable counterparts, other means of enjoying music away from computers-CD-R and CD-RW drives-will in fact "dwarf" penetration of digital playback devices in the next five years and will be "the device of choice for the music downloader," Jupiter predicts.
THE BIG SQUEEZE
A final critical component for a mass digital-music market to develop, according to Mooradian, is broadband access.
"Downloading a song is one thing, but the industry today is made up mostly of album sales," he says. "And without a broadband connection, it makes downloading albums fairly unrealistic, or certainly not for a mass audience, and that's going to hinder things."
Jupiter forecasts that broadband penetration of online households will reach only 19% in 2002.
"We're not trying to rain on anybody's parade here," sums up Mooradian, "because digital download is a market that's going to grow, and it's going to grow really rapidly. But it's starting from scratch, and it's going to take some time."