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Commentary: For downloads, things are looking up

The combination of lawsuits to deter music pirates and well-designed legal download services makes legitimate music downloading one of the fastest-growing digital phenomena ever.

Commentary: For downloads, things are looking up
By Forrester Research
Special to CNET
February 4, 2004, 10:50 AM PT

By Josh Bernoff, Principal Analyst

Apple iTunes' Windows success exceeded all expectations, including ours. Now we update our projections and look for digital music's next big success--in Europe.

The combination of lawsuits to deter music pirates and well-designed legal download services has made legitimate music downloading one of the fastest-growing digital phenomena ever. In revised estimates that Forrester announced at the recent MidemNet conference in Cannes, France, we projected that download sales in the United States generated $36 million, and subscriptions $47 million in 2003, representing about 0.8 percent of the total music market.

We haven't significantly changed our projections for subscriptions or CD sales, as 2003 ended the way we expected. In fact, while CD sales were down slightly, downloads and subscriptions kept the year from being a disaster like the previous two were.

• Downloaded tracks to pick up steam. Download services grew faster than we expected in 2003. Apple recently announced that it has delivered 30 million paid downloads, representing roughly 70 percent of the total commerce in download tracks. But things are just getting started.

Pepsi will distribute 100 million free iTunes downloads in a promotion tied to the Super Bowl, and HP-branded iPods will launch later this year, including a new model that retails for $249. Adding in business from runner-up Napster, a new service debuting from Sony, and half a dozen other download services, we expect tracks to generate more than $200 million in 2004--up almost $40 million from our prior forecast.

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• Subscription services to stay on track. AOL MusicNet and RealNetworks now claim more than 100,000 subscribers each. As download bills mount up, many digital music subscribers will begin to consider fixed-price monthly subscription services. Subscriptions will get a midyear boost when new portables based on Microsoft's next-generation digital music format will support subscription music content, allowing subscribers to take their music with them. If Apple continues to resist subscriptions, Napster, which offers both subscriptions and downloads, will benefit. Look for digital music subscriptions to top $100 million in revenue this year.

• CD sales continue to rebound. We stand by our projection that 2004 will be the first year of growth for CD sales since 2000. But in the long term, as downloads and subscriptions grow and soak up dollars, CD sales will start shrinking again in 2007. As we said at MidemNet, music labels should get out of the plastic business: Spend less energy on manufacturing and distributing a shrinking number of CDs, and focus more on the new source of growth--downloads and subscriptions.

• Attention to shift to Europe. MidemNet attendees all had the same question--when will digital music success be duplicated in Europe? The answer: soon. Until now, the welter of country-by-country publishing clearances for song copyrights has slowed the debut of services from Apple and Napster, but both should go live in Europe this year. With a lower broadband penetration, look for European digital music to evolve more slowly.

© 2004, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.