Looking for ways to replace CD sales in a flash

NEW YORK Throughout the 1990s, CDs were a customer traffic driver for many retailers, and some even built their business models around them. But all that’s changed now as retailers are scrambling to come up with new ways to make up for lost sales.

A new report from the International Federation of the Phonographic Industry shows it’s going to be a challenge. Music sales in 2007 fell for the seventh straight year, declining 14% overall, with CD sales falling 19% in the United States. In its 2008 report, the IFPI said that “digital sales continue to grow, but have not yet offset the sharp decline in CD sales, resulting in a worldwide market decline in 2007.”

And those CD sales are crumbling fast. The IFPI says CD sales have dropped more than 30% in the past three years, from 21.5 billion units worldwide in 2004 to 17.5 billion units in 2006 to an estimated 15 billion units last year.

Analyst Andy Hargreaves with Pacific Crest Securities said lost revenue from CD sales isn’t the only issue retailers are dealing with. “Trying to make up for the customer traffic that’s being lost is an even bigger problem,” he said.

Nearly all that money and traffic is being lost to the Internet. Digital music sales worldwide jumped 40% to $2.9 billion in 2007 and accounted for 15% of total sales, up from 11% in 2006. In the United States, they represented twice that amount, with the IFPI reporting that “digital sales in the United States accounted for nearly 30% of the market.”

That market is dominated by Apple, which has sold more than 4 billion songs on iTunes since its inception and captures nearly 80% of digital sales. Joining the fray are online retailers like Amazon, which has teamed with Pepsi to promote its 89-cent downloads with a billion songs giveaway using points embedded inside Pepsi bottle caps that can be redeemed for songs online.

With more sales migrating away from physical media each year, retailers are being forced to scale back on the amount of space they dedicate to CDs in stores. And at the same time, they’re looking for ways to grab a share of online sales with branded programs.

Best Buy has CD burning stations positioned at the front of stores where customers can browse a song catalog, download the tracks of their choosing onto a CD and pay for it at the counter. It also offers access to millions of songs online through a partnership with Rhapsody and at a site for independent music called eMusic. Circuit City has a joint venture with Napster that offers unlimited downloads for $14.95 per month and features updated music charts and personalized recommendations.

But competing against Internet-based music retailers isn’t easy and compounding the problem is the fact that some artists are going directly to consumers. Radiohead released its new album, “In Rainbows,” on its Web site last October and sold it to fans—at the price of their choosing—for three months before releasing it at retail in January.

Alternative release formats could also work in favor of retailers. NPD Group analyst Russ Crupnick notes that Matchbox  Twenty and other bands have opted to use a flash drive, as opposed to a CD, as a vehicle for recent releases. And there’s even a retail store online dedicated to selling flash-drive albums. Minnesota-based Indiedrive sells new releases for $20 but says the price also includes the flash drive, which can be reused for other purposes after the album is downloaded.

“So the industry is working with alternate formats and different configurations when it comes to physical media and that should help,” said Crupnick. He also said retailers like Best Buy are reaching into the online world and selling iTunes gift cards in stores and online as a new source of revenue.