What's driving rise in music sales?

Album sales edge up 1 percent for just the first half of the year and suddenly it seems everybody in the music industry is giddy.

That's likely due to the fact that since 2004, all the news about sales has been bad, bad, bad. Consider that the music industry hasn't seen growth since George W. Bush was preparing for a second term as president, the Boston Red Sox were breaking the curse of the Bambino, and Mark Zuckerberg was founding Facebook.

Last Wednesday, research firm Nielsen SoundScan announced that the industry recorded a 1 percent increase in overall U.S. album sales for the first six months of the year, snapping a dismal seven-year run of sales declines. Digital music helped power the gains as sales of digital tracks rose 11 percent, a rebound from the 1 percent growth for all of 2010. Digital albums grew at a healthy 19 percent.

Nobody is dancing in the streets, but the numbers have stirred hope among some connected to the business that a decade-long revenue slide--which they trace to Napster and the onset of illegal file sharing--may be over. "I think the rise in album sales certainly gives one cause for cautious optimism," said John Marmaduke, CEO of Hastings Entertainment, a chain store that sells books, DVDs, and CDs.

Of course, there's nothing to say that the second half of the year won't bring more losses and it's not clear whether the rise in unit sales will translate into revenue growth. Nielsen tracks unit sales and not the revenue generated. The Recording Industry Association of America (RIAA) collects that data but doesn't report until after the end of the year. And the last full year that revenue was up was--you guessed it--2004. Total music sales were more than $12 billion then. They tumbled to $6.8 billion last year.

The graphic below charts the amount of revenue generated by overall music sales for the years 1996 through 2010. Note that 2004 also halted a string of revenue declines, but in that case the upturn was short-lived. The obvious question here is whether the recent sales boost is also an anomaly?

It might be easier to answer that question if we knew what triggered the sales increases. Nobody seems to know for sure, but some of the experts and people on the front lines of music retail agree several factors likely played a part.

Death of LimeWire
The four largest record companies took down LimeWire, at one time the most popular way to download music illegally. NPD Group, a research firm, reported in March that 56 percent of everyone who downloaded music illegally with a peer-to-peer service in the third quarter last year did so with LimeWire.

The RIAA prevailed last year in a copyright case it brought against the company behind the peer-to-peer network and founder Mark Gorton. A federal judge found Gorton and the company liable for copyright infringement and ordered the service be shut down. Gorton, who closed the service down in October, later paid RIAA members $105 million in damages. NPD reported that the percentage of Internet users who download music via P2P services in the fourth quarter of 2010 was 9 percent. For the same period three years earlier, the percentage of users downloading via P2P was 16 percent.

"We're still an industry that is hard hit by digital theft and half the size it was ten years ago," Mitch Bainwol, the RIAA's CEO, told CNET in an e-mail. "There's probably no one single reason (for the rise in sales), but improved marketing efforts ...and antipiracy successes like the closure of LimeWire have helped."

Not everyone agrees that LimeWire or P2P services stifle sales. Wayne Rosso, the former president of defunct file-sharing network Grokster who now blogs about the music industry, says that the last time the recording industry saw album sales climb was in 2004, when there were a dozen file-sharing services operating, including Grokster, eDonkey and BearShare. Rosso said plenty of studies show file sharing stimulates song sales.

"This minor blip is nothing to get too excited about," Rosso said. "But it really shows it's all about the product...music has to have legs. That's what has been lost in the last decade: quality."

It's the music, stupid
Adele, the 23-year-old British singer-songwriter can certainly claim some credit for the increases. Her album "21" was No. 1 in the year's first half with 2.5 million albums sold. Lady Gaga's "Born This Way" was second with 1.5 million.

Certainly, a recent trend of retailers chopping at prices--none more so than Amazon--has helped lure music buyers. In May, the company stoked demand for "Born This Way" by offering the entire album for 99 cents. The digital stampede to the site ended up taking down Amazon's servers.

Not every retailer has to cut that deeply, said Marmaduke, from Hastings Entertainment. He said some catalog CDs are selling well at between $3.99 and $7.99. "When you're competing with rampant piracy," Marmaduke said, "the best way to combat it is to lower prices."

Related links
• RIAA wins big in LimeWire lawsuit
• Amazon helps Lady Gaga top 1 million in sales
• What happens when the CD factory closes?
• Music sales dip; Net seen as culprit

Russ Crupnick, NPD's senior industry analyst, said price doesn't mean much if the listener doesn't like the song. He said his studies have shown people seem to be interested in music again. For this he credits some of the hot new acts as well as better music-discovery tools (Pandora, YouTube, and Slacker), listening devices (smart phones) and one factor that surprised him...

Is 'cataclysmic drop' over?
Crupnick suspects that the digital revolution might have finally burrowed down to the core CD fan. Anybody who is going to migrate to digital has done so, leaving a group of consumers who prefer to own discs rather than song files. For retailers and record companies, CDs traditionally produced better profit margins than digital albums.

"The cataclysmic drop in CD buyers may have stopped," Crupnick said. "Between the years 2006 to 2009, the number of CD buyers dropped by around 20 million. We talk about young people and the lost generation but some of these younger music buyers are telling us 'I want that thing I can hold, the liner notes and album cover and the other ancillary materials that come with physical products."

None of the good news can erase the fact that the recording industry still faces plenty of threats and uncertainty.

The number of music retailers continues to fall. In the past 10 years, Tower, Virgin, and Circuit City disappeared. Earlier this year, Borders, the book merchant that also dedicated a big portion of floor space to CD sales, filed for bankruptcy protection and closed 226 stores. Music industry sources say that Best Buy, the consumer-electronics chain and one of the country's largest music retailers, has warned record companies that they may follow Wal-Mart's lead and reduce the floor space dedicated to CDs. A Best Buy spokeswoman declined to comment.

On the digital side, the news hasn't been much better. Imeem, SpiralFrog, Ruckus, iLike, and MySpace Music are gone, either sold for pennies on the dollar or forced to shut down.

The labels, however, haven't played all their cards. New music services from Google and Spotify are launching. The RIAA also isn't letting up on antipiracy. On Thursday, the trade group announced that it had successfully enlisted the help of some of the country's most powerful Internet service providers to combat illegal file sharing.

Any impacts this might have on sales won't be felt for sometime. So, the next chance the industry will have to test its health will come next year, when it will learn whether this latest sales trend was just a blip or whether the times are a changing.