Kill CDs, Think Digital First, Record Industry Advised

"Death to the CD! Long live digital music!" might just be the new mantra for the record industry if it listens closely to one technology analyst group.

Gartner on Monday advised record companies to drop retail CDs as their primary revenue generator before next year's holiday shopping season and adopt a "digital first" strategy that focuses on online distribution.

By continuing to prop up the CD business, rather than making a full-court press on online distribution alternatives, the record industry has neither succeeded in ending piracy nor has it done a whole lot to re-create the business models of the old record business so they can thrive in the digital world.

"Music labels should instead emphasize digital first, making all new releases and catalog issues via digital services and moving CDs to an on-demand publishing mode," Gartner analyst Mike McGuire said in a statement.

CD sales are dropping rapidly in markets worldwide and are unlikely to ever make a comeback, according to Gartner. As a percentage of revenue in the U.S. market, physical media, such as CDs, vinyl LPs, and DVD-A, has fallen to 77% in 2007 from 91% in 2005. In addition, there's evidence that brick-and-mortar retailers are reducing floor space dedicated to CDs.

With 77% of U.S. households expected to have broadband connections by 2012, the time to shift strategies is now, according to Gartner. Besides the expected 96 million U.S. broadband connections in four years, Wi-Fi-enabled notebooks and better media-enabled mobile phones will offer consumer-reaching paths for marketing, promotion, and distribution outside the home.

As Gartner sees it, record companies would be better off distributing songs and albums online first, and leveraging social networks as promotional tools to drive sales at online sites and the growing number of mobile music services.

By adopting a burn-on-demand model for CDs, record labels can cut the expense of trying to guess consumer demand for albums and reduce shipping costs, Gartner said.

"This is not to say that the physical CD would disappear altogether," McGuire said. "Rather, it could shift to being a promotional tool to be sold or given away at concerts, for example."

Gartner also recommends that record labels develop comprehensive and flexible licensing to optimize online services.

Gartner's recommendations are in line with a recent report from consulting firm the NPD Group, which found that the number of CDs purchased in the third quarter of this year fell by 19% from the same period a year ago. The most dramatic decline was among teenagers, 34%, and adults ages 26 to 35, 36%.

The full Gartner report, "Christmas 2008: The Last Year Of The Retail CD," is available on the firm's Web site.