Half of all music sold in the US will be digital in 2011 and sales of digitally downloaded music will surpass physical CD sales in 2012, according to a new report by Forrester Research. Digital music sales will grow at a compound annual growth rate of 23 percent over the next five years, reaching $4.8 billion in revenue by 2012, but will fail to make up for the continuing steady decline in CD sales.

In 2012, CD sales will be reduced to just $3.8 billion.

“This is the end of the music industry as we know it,” said Forrester Research Vice President and Principal Analyst James L. McQuivey. “Media executives eager to stay afloat in this receding tide must clear the path of discovery and purchase, but only hardware and software providers can ultimately make listening to music as easy as turning on the radio.”

The Forrester report is based in part on a survey of more than 5,000 consumers in the US and Canada. Among the drivers of Forrester’s five-year forecast for music sales:

MP3 player adoption. The average MP3 player is only 57 percent full, suggesting that the devices are underutilized, while more of the devices are being bought by households with more than one MP3 player. Moving forward, a majority of MP3 players will be sold to households that already have one.

DRM-free music. With the four big music labels now committed to eliminating digital rights management (DRM), DRM-free music will extend beyond pioneer Amazon.com to Apple iTunes and the other major online music sites.

Social networks. DRM-free music enables every profile page on MySpace.com or Facebook to immediately become a music store where friends sell friends their favorite tracks.

Forrester believes digital downloads are the logistical mass market for the future, satisfying all the needs that people have when it comes to music -- easy to find, easy to buy, and easy to listen to, regardless of the device. On the other hand, subscription music services will show modest growth, reaching just $459 million in revenue in 2012 according to Forrester’s projections, while experiments in ad-supported downloads will be silenced by the powerful combination of DRM-free music and on-demand music streaming on sites like imeem.com.

“The industry has to redefine what its product is,” said McQuivey. “Music executives have spent years tracking CD sales. But the artist is the product -- not just the source of it. New forms of revenue will come from unexpected sources. For example, the industry has failed to capitalize on the growing popularity of video games such as Guitar Hero and Rock Band. In a market where musicians are happy to sell a million copies of a CD, a video game market where titles can sell five million copies is enough to motivate even the most depressed music executive.”

About this study

For the Forrester Research report, “The End Of The Music Industry As We Know It,” Forrester interviewed and was briefed by MP3 player manufacturers, music labels, online music distributors, Internet radio providers, and others in adjacent spaces in writing this report. In addition, Forrester surveyed more than 5,000 online consumers in the US and Canada in Q3 2007 and asked them where and how they listen to music and audio, specifically including MP3 player use and digital audio file downloading and listening, whether on a PC or a portable player.

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