Music industry blames MP3 for sagging sales

The RIAA, which represents U.S. record labels, this week released its annual report, the "1998 Sound Recording Consumer Profile." In the "age" category, the RIAA found: "The trend towards an older purchasing demographic continued. In fact, consumers over 30 were the only age demographic to show any growth last year.

"The continuing drop-off in the proportion of purchases accounted for by 15- to 24-year-olds (32.2 percent in 1996 vs. 28 percent in 1998), once the mainstay of the market, is puzzling. Potentially the rise of the Internet as a free entertainment center, and the accompanying availability of free MP3 music files, could be contributing factors," the group added.

MP3 (MPEG 1, Audio Layer 3) is an audio compression format that allows users to download music tracks and save them onto a PC hard drive or a portable MP3 player.

The RIAA has said publicly that it does not oppose the format itself, but rather is simply concerned about its favor among music pirates. Still, the trade group is suing Diamond Multimedia over its Rio portable MP3 player, for example. And just yesterday the RIAA said it is considering suing Lycos over its MP3 offering.

But the idea that MP3 is to blame for the drop in CD sales is "naive and unsupported," Mark Hardie, senior analyst at Forrester Research, wrote in an email message to CNET News.com. "The fact that teens use computers more on a daily basis is impacting all other forms of entertainment consumption.

"But narrowly pointing to MP3 as a culprit for lost sales is grandstanding," he added. "MP3 is having a negligible impact on industry music sales. PCs are impacting the way consumers enjoy entertainment overall. The industry needs to stop crying about MP3 and start developing business models around digital entertainment delivery."

Some companies already are doing just that--and MP3 may or may not be the technology of choice. Online record company GoodNoise, for example, said yesterday it received $31 million in financing--dwarfing the $11 million MP3.com got in January from Sequoia Capital and idealab.

Gene Hoffman, president and chief executive of GoodNoise, today said the lack of authorized downloads is to blame for the proliferation of pirated MP3 files. GoodNoise, for its part, sells authorized music downloads.

"If nothing the customer wants is available in the format in which they want it, you're going to have piracy," Hoffman said, adding that failing to offer more in-demand music for authorized download "is a great way to not make customers happy."

The music industry has begun offering songs for download, generally via more secure technologies such as a2b Music and Liquid Audio. Those downloads have mostly been for promotional purposes--for example, in April 1998 Atlantic Records teamed with a2b to offer a single by Tori Amos for download for fans who preordered her upcoming CD.

GoodNoise over the next two to three months will be expanding and building a brand based on the name "eMusic.com." GoodNoise will continue to support its online record label offering alternative rock music, but the company plans to branch out with new labels for hip-hop, electronica, Latin, and other genres, as well as continue its alignments with independent labels such as Rykodisc. Music from all these genres will be available for sale at eMusic.com, Hoffman said.

For the moment, the company is sticking with MP3 because it is "massively adopted," Hoffman said, but moving forward, the firm is "format agnostic"--and notably, "MP3" doesn't appear in its names.

"The MP3 community is what we embrace," Hoffman said. "As for the technology, the coding stinks. Right now we feel MP3 is massively adopted--it's the Windows OS of digital download technologies." But, he added, the firm will switch to another technology if it gains widespread acceptance.

Mark Mooradian, analyst with Jupiter Communications, said in a recent analyst note that what is likely to topple MP3 is a better compression format.

"Today's compression schemes have impressively delivered near-CD quality sound," Mooradian wrote. "The problem is that?onerous downloads are the reality for mainstream consumers accessing the Internet over dial-up connections. For households with only one phone line, this is especially unrealistic.

"A new file format that doubles or triples the compression and subsequently cuts the download time while maintaining the sound fidelity may well obviate the demand for MP3 simply because it is far more practical," he added.

In addition, "While the idea of achieving near CD-quality sound with better compression is highly appealing, attaining CD-quality sound is the Holy Grail, particularly from a marketing perspective," Mooradian wrote. "As the industry proved with the advent of the CD (from vinyl), consumers can be swayed by the promise of better sound fidelity."