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12/18/2008
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Digital Downloads Rise As Music CD Sales Fall

The overall market includes purchased CDs and digital music downloads, files obtained on P2P sites, and borrowing music files to rip to a computer or burn to a CD.

U.S. Internet users downloaded more music from online retailers and peer-to-peer sites in the third quarter, as CD sales among the same consumers continued to fall, market numbers released Thursday showed.

Paid digital downloads saw growth in the number of buyers and tracks sold in the quarter, according to the NPD Group. Fully, 15% of Internet users bought music from online stores, such as Apple iTunes or Amazon, which is an increase of 2 percentage points over the same period a year ago, or 2.8 million more music-download customers. In terms of volume, the number increased 29%.

The number of people sharing music on peer-to-peer sites held steady at 14% in the quarter, but the number of tracks shared rose by 23%. The practice of sharing files to burn them to a CD fell 25% among teens, suggesting an increased preference to having the files in digital formats.

"The [music] industry has managed to constrain the number of people who are file sharing," NPD analyst Russ Crupnick said in a statement. "But the expanded use of services such as Bit Torrent enable entrenched P2P users to download a growing number of files."

While digital downloads are growing among Internet users, CD sales are taking a dive. NPD found that the proportion of Internet users age 13 and older purchasing a CD in the prior month fell to 22% from 25% in the third quarter last year. The number of CDs purchased fell by 19% compared to a year ago, with the most dramatic declines among teens, 34%, and adults age 26 to 35, 36%.

The decline in the CD market brought down the overall music demand among Internet users by 2%, NPD said. The overall market includes purchased CDs and digital music downloads, files obtained on P2P sites, and borrowing music files to rip to a computer or burn to a CD.

With the growing preference for music in digital formats, NPD said the music industry will have to fill the revenue gap left by falling CD sales with alternative distribution deals in mobile and social networking. In addition, music-based video games, such as Rock Band and Guitar Hero, are growing in popularity, and many gamers say the titles have triggered a digital-music or CD purchase.

Despite the growing popularity, a consistent consumer headache in digital music is copyright protection technology, called digital rights management, that often prevents music files from being played on different devices. Music bought through Apple iTunes, for example, can only be easily played on the company's iPod player.

Some major retailers, such as Amazon.com, Best Buy, and Wal-Mart, have started selling DRM-free music.

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