Perhaps the demise of the CD will come more rapidly than first thought. Over the Christmas holidays, the number of downloads on iTunes skyrocketed, proving Apple’s smart tactic of selling iTunes gift cards at retail outlets. Since then more indicators are emerging.

Last week, Trans World announced their Q4 2007 financial results. Music sales dropped 28% in Q4, the top 50 music titles dropped 35% in Q4 and for the entire year the store’s music sales dropped 23%.

Two weeks ago, the NPD group released a report indicating that “consumer music acquisition increased by 6 percent in 2007, but average annual per-capita music spending fell by 10 percent”. The report also indicated that one million consumers dropped out of the CD buyer market in 2007, led by younger consumers. According to the press release, 48 percent of U.S. teens did not purchase a single CD in 2007, compared to 38 percent in 2006. Also NPD ranked Apple’s iTunes as the number two US music retailer, only behind Wal-mart.

Also last week, JupiterResearch announced that the digital transition was well underway, but digital sales are not enough to save the music industry. The announcement went on to say that “Yahoo! became the third big player to drop out of on-demand subscription services”.

Is Apple going to be the recording industry’s nemesis? Who will step up to the plate and provide consumers with a healthy alternative? Yahoo! couldn’t do it. Tower Records couldn’t do it. Trans World isn’t doing it.

Apple really understands the entire music experience. Apple also understands how to make it “just an Apple experience” and how to “lock us in” to their approach.

As far as the CD is concerned, its time has passed, just as vinyl and tape cassettes. This is the time for digital music, either as downloads or streams. As the market evolves, I hope that we have more than one choice of digital retailer to purchase and experience music. Competition not only maintains a healthy price point, but it also helps create interesting innovation.

Universal Music Group along with SonyBMG and potentially Warner Music will join forces to provide a new subscription based music service targeting the iTunes and mobile consumers.

According to Macworld: As well as launching a rival to the iTunes music store UMG hopes to nurture the adoption of other music players such as Microsoft’s Zune, and develop a new business model in which music for consumers becomes essentially free.

JupiterResearch’s Mark Mulligan believes “the idea of working with device manufacturers to get revenue directly for music is not actually that crazy an idea”, while podcasting news provides us with Five Reasons Total Music Will Be A Total Failure.

From everything I’ve read, I’m of the opinion that Total Music is counterproductive in terms of DRM, consumer rights and business model.

The recording industry needs to agree on a viable approach to DRM that encompasses multiple devices, including the market leading Apple iPod. If Total Music doesn’t interoperate with Apple’s iTunes/iPod it will face an up-hill battle. Removing DRM and using watermark or similar technology will go a long way to overcoming the DRM issue we face today.

Total Music and its association with the big recording giants is likely to confuse people. On the one hand the recording industry is intimidating people through RIAA lawsuits, while on the other hand they want to hide the subscription fee so people don’t know they are paying for the right to legally listen to music.

No business model is free to the consumer. There’s always a hidden price to pay somewhere. It could be built into the purchase price of a device, subsidized by advertising or incorporated into a monthly phone bill - ultimately the consumer will be paying for the service. It seems to me that the recording industry is applying a web 2.0 approach to the Total Music business model and ultimately creating a very interesting experiment.

Clearly, this is an attempt by the recording industry to ensure that Apple iTunes/iPod does not develop a stranglehold on the digital music sector, something the PC industry couldn’t do with Microsoft. I believe that Total Music will be a distraction from the real work, that of alligning the business model with consumer behaviors and market opportunities.

In my opening statement at the Future of Music, Copy Rights or Wrongs panel I talked about the nature of the shift occurring in the music industry.

The music industry is shifting from being a business associated with CD sales to the virtual world of digital singles, consumers with multiple music devices, and a society that increasingly believes that recorded music should be free.

The shift to virtual music is so profound, that it is cracking the very foundations of the recording industry. The recording industry should be fighting for survival by adopting new, innovative ways to make money. And, it should be doing this as rapidly as possible. In reality, the recording industry can’t embrace the digital world fast enough. Instead, it is trying to slow the rate of change by changing copyrights into copy wrongs.

One of the examples I spoke of was how copyright law was being manipulated through proposed legislative changes as well as by RIAA lawsuits. The idea of “fair use” has been with us for many years and has been an integral component of property and copyright laws. It is now under attack. If the recording industry gets its way we may see fair use completely eliminated.

What does this mean? We may be forced to purchase separate copies of every song for every device we own. This would mean If your household owns five iPods, you would buy five copies of each song.

Only yesterday, at the RIIA lawsuit underway in Duluth, Sony BMG’s chief anti-piracy lawyer was asked if it was wrong for consumers to make copies of music which they have purchased, even just one copy. She replied, “When an individual makes a copy of a song for himself, I suppose we can say he stole a song.” Making “a copy” of a purchased song is just “a nice way of saying ’steals just one copy’,” she said.

I agree that the recording industry’s value proposition is under attack by the technology industry and in some cases has been completed hi-jacked. Current copyright laws may not be enough to protect “virtual” music. The answer, however, is not to change the laws or shackle technology innovation. There are still many more ways to make money from music.

We must start by incorporating technology into the business model itself. Instead of trying to maintain an existing business model through lawsuits and legislation, I propose the recording industry and the technology industry work as one in developing a new and successful business model. Until this happens we will continue to see a disenfranchised consumer, technology innovation that abuses copyright and plummeting record sales.

Last week, at the Commonwealth Club of California, we had a lively panel discussion on the future of music. On the panel were Chris Castle, Tim Westergren, Eoin Harrington and David Rosenheim.

Topics included: the clash of the recording and technology industries, compulsory licensing and copyright, new music business models for both the artist and the recording industry, new music licensing models and issues with US versus world wide licensing. We discussed these topics from a legal, technology and musician’s perspective.

On a lighter note, Eoin explained how a young starving artist uses “lip balm” to promote his music.

According to Nielson Soundscan, album sales continued to drop in the first half of 2007 by 15% while digital track sales gained 49%. As compared with previous years the decline in album sales is accelerating from 4% in the first half of 2006 and 10% during the same period in 2005.

We’ve gone full circle. The single is back and it looks like it’s here for good. Single digital track sales allow people to buy only the songs they want, and skip buying 10 track CDs, with song they may not want. While it looks like the music business is healthy, the revenue generated from album sales is declining faster than the increase in revenue from single digital tracks.

In an early post, The 3 track ablum and other heresies I suggested that one way for the recording industry to overcome this decline in 10 track albums might be to produce 3 track digital albums for the consumer. Hopefully, the labels are looking at this or other innovative ideas to overcome it’s woes.

The Commonwealth Club radio program of the Future of Music: Digital Rights or Wrongs panel will air this week on NPR. The program will be broadcast locally in the San Francisco bay area on Tuesday, July 3rd, 2007 at 1 pm on KALW-FM, 91.7. It will air at different times across the country.

Click here to listen to this program using the RealOne Player.

Last week, I was a panelist at Digital Hollywood. As usual I was invited to speak to issues around the intersection of technology, digital entertainment business models and content licensing. It turned out to be a great discussion. I suspect that the panel moderator, Mike McGuire of Gartner, had hoped to pit us against each other, and to a certain extent he did. In fact we did not agree that outdated copyright laws and complex content licensing are a bad thing.

The panel split into two groups, the lawyers and the entrepreneurs. We had very different perspectives on how to solve the difficulties, complexities and time involved in negotiating content licensing, especially for new tech enabled entertainment startups.

Technology now enables us to push the edge of the envelope with new entertainment business models. Consumers and artists are ready to try new approaches. In fact, one audience member suggested that Creative Commons offers a solid alternative to the current approach.

This panel, reinforced my opinion that the greatest obstacle to new entertainment business models may be outdated copyright laws and not content pirates or fear of technology.

Since Steve Jobs posted his open letter in February this year, calling for the abolition of DRM protected music, there has been several changes in the recording industry. EMI have taken the plunge and released their music on iTunes at a higher quality and higher price — all DRM free.

Last month, in an article in Forbes entitled “Why Online Music Will Stay Locked Up” it was noted that Universal Music Group, had been mulling the possibility of dropping usage restrictions, according to Amanda Marks, Universal’s executive vice president and general manager of digital distribution.

“It is a step that we would not take lightly,” Marks said, adding that “if further tests prove that this provides us with a net positive sales result, by which I mean sales increase more than piracy, then we will try to work out a reasonable solution.”

Just this week Digital Music News reported that Universal Music Group is now actively discussing a possible DRM-free play with Apple.

Between them, Universal and EMI have nearly 50% of the recording industry market share in music purchases. If Universal takes the plunge, it’s my bet that we’ll see the other 2 major labels, Sony BMG and Warner, quickly follow suit.

Wouldn’t it be great to be totally rid of DRM protected music this year. As a consumer, just to have full music interoperability between my different computers and music players, will open my wallet to purchase more online music. As the CEO of Avvenu, where we offer the ability to stream your iTunes music over the internet to another computer or a windows mobile phone, I’ll be happier when we can provide an even better listening experience for our users.

Last week, Trans World Entertainment, which operates over 972 retail stores, announced their Q1 earnings — music sales were down by 21%. Music which represented 53% of their business a yaear ago, now represents 44%.

Late last year, Tower records closed their doors for good.

It was reported in January, that 2006 overall CD sales fell by 5% from approx 619 million units to 588 million, with Independent stores feeling the brunt of the change, down by 18% and mass merchant sales down 4%. On the other hand, digital track sales in 2006 increased over 2005 by 65% to 582 million tracks. We all know that this was not enough to overcome the drop in CD sales.

Regardless of any other business management issues, retail music stores are victims of the larger issues around consumer interest in traditional CDs. It will only get worse unless the labels and artists deliver new approaches to the traditional CD.

While at Musexpo a couple of weeks ago, I was lucky to hear a relatively new band, called “A Fine Frenzy”. Their songs were fresh and well written. Upon returning to the bay area, I decided that I wanted to purchase a couple of the songs I’d heard, so I went to the band’s website and to their myspace page only to find that the CD wasn’t going to be available until July 17, three months from now. I checked iTunes and they only had one song from the new album and it wasn’t the one I was looking for. I considered using a stream ripper on the band’s website, but realized it was not appropriate. For a few seconds it also crossed my mind to use Limewire or other torrent sites to see if I could find these songs. Now I understand one of the reason’s for music piracy — not that I condone it.

What’s amazing is that the songs are being used for promotion, at live venues as well as on the band’s website and myspace page, but the ability to purchase this music is still several months away. Maintaining this manufacturing business model will ultimately be the downfall of the recording industry. Moving to digital economics where music is available for download even before it’s availability on CD (or even on CD at all) will go along way to increasing music sales. A modernization of the business model where digital economics are at the forefront may ultimately save the recording industry or at least morph it into a new substainable business.

Yesterday we had a lively discussion on the future of music. Topics included: the issues facing the recording industry, the artist as a brand, the value of music to the consumer and music within a subscription model. A video of the complete panel discussion is available on fora.tv. A series of photos taken by Stephen Hill can be found on flickr.

On May 7th, at the Commonwealth Club in San Francisco, I’ve been asked to moderate a panel on the Future of Music. I’ve decided on a few key topic areas to take the panel. They are: Music Sharing - Is it possible to move towards legal sharing methods, where artists and copyright holders are appropriately compensated? What will music rights and creative license mean in the world of new technologies? How will we access and enjoy music? What is the value of Music - Is 30 cents really worth it to eliminate DRM? Is the Internet surpassing radio as a means of music discovery? Will the recording industry business models be forced to change in order for the major labels to stay in business over the next few years?

If you would like me to consider other topics, or have questions you would like to ask the panel during the open Q&A, please comment on this blog post. I’ll post the answers shortly after the event.

If you are in the San Francisco bay area and would like to attend the event, tickets can be purchased online or at the door.

Panelists:
TED COHEN, Managing Partner, TAG Strategic; Former Senior Vice President, Digital Development and Distribution, EMI Music
RICHARD FRENCH, CEO, Avvenu; Former Senior Vice President, Open Source Development Network, Moderator
GERD LEONHARD, CEO, Sonific; Co-author, The Future of Music
LEE SHUPP, Vice President of Business Strategy, Cheskin; Board Member, Association of Professional Futurists; Musician