The firm said 20 percent of Americans engage in music downloading, and half of the downloaders said they are buying fewer CDs. By 2008, 33 percent of music sales will come from downloads, with CD sales down 30 percent from their 1999 peak. On-demand movie distribution will generate $1.4 billion by 2005, and revenue from DVDs and tapes will decline 8 percent, Forrester predicted.
"The shift from physical media will halt the music industry's slide and create new revenues for movie companies, but it will wreak havoc with retailers like Tower Records and Blockbuster," Josh Bernoff, principal analyst at Forrester, said in a statement. "As a result, we're about to see a massive power shift in the entertainment industry."
According to the study, in the next nine months,will emerge, creating alternatives to illegal file sharing. America Online already has 90,000 MusicNet subscribers; Musicmatch and RealOne Rhapsody are expected to differentiate their media players with Web radio; BuyMusic will try to take advantage of its early entry with personalized recommendations from ChoiceStream; and Apple Computer will release a Windows version of its popular iTunes service.
Forrester predicted that by the end of 2004, Apple and possibly Musicmatch will emerge as leaders, file sharing will be in decline, and downloads and on-demand subscriptions will bring in $270 million. Surging online revenue--including subscription services--will increase music sales by more than a half billion dollars in 2004, according to the study.
The research firm said music companies and studios are realizing that they must create new channels for online delivery. Consumers, tired of paying high prices for CDs and DVDs, are looking for flexible forms of on-demand media delivery.
"Technology trends like increased broadband adoption and cheap, widespread storage have made it possible for consumers to easily manage their digital entertainment at home," Bernoff pointed out.
The survey also shows that the music industry'sfor online piracy through software such as Kazaa might pay off: More than two out of three young file sharers said they would stop swapping if there were a serious risk of jail or a fine.