Legal downloading is on the upswing, but the percentage of households downloading unauthorized files through peer-to-peer (P2P) services is still growing, The NPD Group determined after surveying consumers in July.
The percentage of Internet-connected households downloading from authorized music sites grew slightly in the first half, as did the percentage using P2P services, NPD found. So far, the percentage of households using P2P services continues to run ahead of legal-download households (see table).
Although authorized downloading is growing, it hasn't grown nearly enough to compensate for declining physical media sales, NPD added. Sales of digital music grew 170 percent in dollars in the first half of 2005, to $198 million at the consumer level, but first-half CD sales were off 6.1 percent, to $4.49 billion at the consumer level, the RIAA (Recording Industry Association of America) reported.
Long-term, NPD foresees strong growth in authorized download site use and flagging growth of unauthorized P2P sharing, although a hard core of P2P users is likely to remain active, said Russ Crupnick, president of NPD's music and movies division.
Authorized download sites are posting "pretty healthy growth" in their "early days," Crupnick said. P2P use, in contrast, continues to grow but at a rate "far under the levels of growth of digital music facilitators" such as broadband connections and compressed-music portables, he said.
So far, he noted "the vast majority" of authorized download users are not migrating from the ranks of P2P users, he said. "Most [authorized downloaders] are mainstream consumers who got a promotional or gift card or an iPod and are entering the digital music environment, often for the very first time," he said.
The frequency of P2P file sharing will eventually decline, however, as "the environment for pirating gets more challenging," Crupnick said. He cited the growing awareness of file sharing as illegal following the Supreme Court's recent Grokster decision, and he pointed out that P2P services are looking at technical ways to share revenue with the music industry.
"The music industry remains in a state of flux between physical CDs and digital music," Crupnick continued. "The growing consumer acceptance of digital music has started to help record companies offset declines in physical CD sales, but the opportunities available in the digital realm have only just begun to be tapped."
Almost seven in 10 households have played authorized or unauthorized compressed-music files, seeding the market for authorized download services, NPD said. These files come from a variety of sources, including ripping from the consumers' CD library, ripping from friends' CDs, purchasing legal downloads or illegally downloading via P2P services.
"Broadband-enabled households with experience creating a digital music file are prime targets for legal digital music," said Crupnick. "There's a tremendous amount of untapped growth in the digital market for both music distributors and retailers."
About 70 million households regularly use the internet and 60 percent of them could become customers for legal digital services, he said.
A total of 69 percent of Internet-using households have at least one digital music file on their home PC, and the average computer music user has 340 music files, up 24 percent compared to the same period a year ago, NPD added.
Seventeen percent of music buyers bought from a legal service in the first half of 2005, up from 11 percent a year ago, NPD also found.
Nonetheless, NPD said, "We're seeing a slow shift from illegal P2P downloading to use of legal digital music services," Crupnick said. "The majority of P2P users have not yet tried or adopted legal services," he explained. The increase in legal downloads "is primarily due to the average music buyer trying legal services," he noted.
"In the early days of digital music, the majority of digital files came from illegal P2P file sharing services. Now we're seeing a rising incidence of legal digital music downloads and a significant slowing in the number of P2P users, as legal services continue to gain traction."
"There are several basic prescriptions for continuing healthy growth in legal digital services," Crupnick concluded. "They include reaching out to broader demographic segments, continuing to pressure illegal P2P services while educating consumers to the benefit of legal alternatives, and providing a compelling price-versus-value proposition to the consumer."
NPD's music-buying surveys are conducted bimonthly among a group of about 5,000 consumers aged 13 years and older. Results are calibrated and balanced to represent the U.S. population, NPD said.