Music business suffers a long, cold winter

By Ed ChristmanMon Apr 9, 1:16 AM ET

While it is no shock that CD sales plummeted in the first quarter, what may be more surprising is who and what are leading that decline.

First things first: Overall album sales for the January 1-April 2 period are down 16.6% to 117.1 million units, led -- or perhaps misled -- by a 20.5% decline in CD album sales.

Industry executives attribute the decline to a weak release schedule, the consumer's loss of confidence in the CD and a reduction in store space for the format.

Certainly, the last point is documentable. Between first-quarter 2006 and now, several key retailers have disappeared. FYE shuttered 131 stores in January, and Tower Records liquidated 89 superstores in December. Musicland also closed 500 stores beginning in January 2006, so many of those outlets -- and their going-out-of-business sales -- contributed to first-quarter 2006.

"We are seeing a customer dislocation," says Mike Dreese, CEO of Newbury Comics, a 27-store chain based in New England. "A lot of people are confused about where they shop, and it's changing their habits ... it takes a while for people to find new stores."

Digital track sales, although they are still growing, could not pick up the slack. More than 280 million digital tracks were sold, outpacing album sales by more than 100 million units, according to Nielsen SoundScan. When those digital tracks are converted to track equivalences (10 tracks counting as one album sale), unit album sales were still down 10.3%.

Digital sales growth is slowing from last year, when tracks were up 87% and digital albums up 144% at the end of 2006's first quarter. At the end of first-quarter 2007, digital track sales were up 51.9%; digital album sales, which total 11.5 million units, were up 56%. But as a percentage of album sales, digital albums are nearly 10% now, versus the 5.2% they were at the end of first-quarter 2006.

Meanwhile, two tracks topped the million-unit milestone: Fall Out Boy's "This Ain't a Scene, It's an Arms Race" and Gwen Stefani's "The Sweet Escape." The top-selling digital download at the end of first-quarter 2006 was James Blunt's "You're Beautiful," which stood at 714,000 scans.

IT'S ROUGH TO BE A WAL-MART IN NASHVILLE

For the first time since the early days of the industry, such mass merchants as Wal-Mart, Target and Kmart have surpassed chains, which include such retailers as Trans World, Best Buy, Barnes & Noble, Newbury Comics and Gallery of Sound.

The discount department stores scanned 44.8 million album copies versus the 44.5 million units that chains sold.

But in a subtle change, for the first time in recent years, mass merchants, with a 17.8% decline, didn't turn in a better performance than the overall U.S. market's 16.6% decline.

Meanwhile, the independent store-sector seems to have stabilized, after shrinking faster than the overall marketplace for the last five years. In the first quarter, indie stores declined 14.5% to 8 million units. In contrast, at the end of first-quarter 2006 when total U.S. album sales declined 5%, indie stores were down 18.5%.

Nontraditional sales -- which include digital album downloads, CD sales through online stores, retailers like Starbucks, TV 800-phone sales and concert hall sales -- continue to be the star performer, with sales up 29.2% to 19.8 million units.

Despite worries about the reduction in store space devoted to CDs, catalog sales, down 14.6% to 47.5 million units, continue to show more strength than current album sales, which are down 18.9% to 69.6 million.

The top-selling album so far this year is Norah Jones' "Not Too Late," with nearly 1.2 million scans, the only album to top the million-unit mark. Last year at the end of the first quarter three albums had hit 1 million units -- Mary J. Blige's "The Breakthrough," the "High School Musical" soundtrack and Blunt's "Back to Bedlam."

Within genres sales, rock, which includes alternative and hard rock and is responsible for nearly 30% of all U.S. album sales, showed resilience to the sales downturn, with the genre and both subgenres down in the 10%-12% range.

The country and rap genres appeared to be the big losers.

Rap, which SoundScan also counts within R&B, had the largest genre decline. Sales fell 33.6% to 10.9 million scans from the 16.5 million units the genre tallied in first-quarter 2006 sales.

R&B, the second-largest genre with scans of 24.7 million units, was down only 17.6% for the year. If rap's decline is removed from the equation, then R&B albums actually showed a 1.9% increase in sales for the year, making that category the only genre to grow.

Country sales were the second-biggest loser of the large genres, with a 30.7% decline to 12.1 million units.

"Country hasn't had sizzle in the new-release category so far this year," says Ben Kline, executive VP of sales, marketing and new media at Universal Music Group (UMG) Nashville, who also notes that carryover sales of 2006 releases are not as strong either.

Indeed, last year, Carrie Underwood's 2005 release "Some Hearts" sold more than 900,000 units in the first quarter; there were two Johnny Cash-related albums that between them sold 1 million units; and Rascal Flatts, Trace Adkins and Keith Urban each had albums that, combined, generated another 1.25 million in sales.

In contrast, this year the three best-selling country albums were Rascal Flatts' 2006 release "Me and My Gang," the Dixie Chicks' "Taking the Long Way" and Tim McGraw's "Let It Go," which just sneaked in with 325,000 units sold in the quarter's final week. Combined, the three have eked out 1 million units.

Fortunately, Kline says the country release schedule for the rest of the year "looks pretty stout."

In the market-share race, UMG held steady in the top spot, racking up a 30.6% slice of the pie in total album market share and 33.6% in current market share. But because of the overall sales decline, UMG's album scans were down 1 million units to 36 million. Sony BMG Music Entertainment had a 7.5 million-unit drop in sales.

The industry remains generally stymied by the freefall.

"I don't know what's going on," the head of sales at a major record label says. "Except it's scary out there and changing every week."