Downloads Did Not Cause The Music Slump, But They Can Cure It, Reports Forrester Research.

Business/Entertainment Editors & High-Tech Writers

CAMBRIDGE, Mass.--(BUSINESS WIRE)--Aug. 13, 2002

Digital Music Subscription and Downloads

Will Exceed $2 Billion By 2007

Contrary to protests from record labels, piracy is not responsible for the 15 percent drop in music sales in the past two years. According to a new report from Forrester Research, Inc. (Nasdaq: FORR), labels can restore industry growth by making it easier for people to find, copy, and pay for music on their own terms. By 2007, digital music revenues will reach more than $2 billion.

"There is no denying that times are tough for the music business, but not because of downloading. Based on surveys of 1,000 online consumers, we see no evidence of decreased CD buying among frequent digital music consumers," said Josh Bernoff, principal analyst at Forrester. "Plenty of other causes are viable, including the economic recession and competition from surging video game and DVD sales. But labels will soon discover that there are several simple ways of satisfying today's sophisticated digital music consumers.

"First, consumers will demand their right to find music from any label, not just two or three. Second, they want the right to control their music by burning it onto CDs or copying it onto an MP3 player. Finally, consumers will demand the right to pay by the song or album, not just via the subscription services now offered by pressplay, MusicNet, FullAudio, and EMusic," added Bernoff. "We call this set of features -- which any paid music service must meet to satisfy customers -- the Music Bill Of Rights."

In the next two years, labels will struggle to deliver on the promise of digital music, but their services will fall short because they fail to match the Music Bill of Rights. But by 2005, labels will endorse a standard download contract that supports burning and a greater range of devices. Downloading will start to soar in 2005 as finding content becomes effortless and impulse buys easy. Labels will make content available on equal terms to all distributors, while online retailers become hubs for downloading.

By 2007, the new business model will generate $2.1 billion, or 17 percent of the music business. Big hits will spark traffic, as people download music directly to their cell phones, portable players, or PCs. As a result of the growth potential, artists will embrace the Internet and sign downloading rights over to their labels -- or see sales suffer.

            2001-2007 Forecast: US Digital Music Downloads

                2001     2002    2003     2004    2005     2006   2007

Physical
 sales       $13,018  $11,391 $10,662  $10,705 $10,657  $10,502 $9,930
Subscriptions     $0       $9     $31      $61    $105     $186   $313
Album downloads   $0       $0     $11      $64    $157     $427   $937
Single downloads  $3       $6     $34     $130    $279     $515   $805
Total digital
 music            $3      $15     $76     $256    $541   $1,129 $2,055

In US$ millions
(numbers have been rounded)

Forrester Research is a leading emerging-technology research firm providing data and analysis that defines the impact of technology change on business. Forrester's WholeView(TM) Research, Strategic Services, and Events help Global 3,500 clients understand how technology change affects their customers, strategy, and technology investment. Established in 1983, Forrester is headquartered in Cambridge, Mass. For additional information, visit www.forrester.com.

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