Yankee Group Forecasts US Digital Music Revenue To Reach $5.34 Billion By 2012

Yankee Group today announced at the 2008 International CES that two fundamental shifts are driving the music industry—digitization and direct-to-consumer transactions. As a result, US recording industry revenue has plummeted 25% since peaking at $14.6 billion in 1999. By year-end 2006, it had declined to $11 billion.

According to the recently published Yankee Group Research Report, US Digital Music Forecast: What Fate Awaits the Record Labels?, digital revenue (online and mobile) is growing, but is insufficient to offset declining CD sales. Over the course of the next several years, Yankee Group anticipates that music industry revenue will begin to stabilize in the US, though at a lower level than previously seen. By the end of 2007, digital music revenue in the US grew to $1.98 billion, and will reach $5.34 billion by 2012. However, artists will increasingly keep the lion's share of this revenue as record labels become marginalized.

"No industry has felt the impact of the Anywhere Consumer more strongly than the recording industry," said Michael Goodman, director of digital entertainment at Yankee Group. "It's not just that the record labels are facing declining revenue; rather, the basic relationship between recording artists, record labels and consumers is in major flux. As bands retain ownership of their music, the record label's role shrinks while the role of technology vendors and online music stores grow."

Yankee Group predicts that within the US digital music industry, online music will grow faster than mobile music downloads and online single downloads will outpace album downloads or subscriptions. Despite wireless carriers' best efforts, online distribution will continue to dominate the category, accounting for 80% of the industry revenue. Although the addressable market for music phones will have grown to more than 266 million, only 9% of mobile users will actively use them as portable music players.

In this Report, Yankee Group also provides important recommendations for record labels and mobile carriers challenged with developing consumer connection during this disruptive period, including:

* Abandon DRM; embrace watermarking: Record labels can't escape DRM, but by embracing watermarking, they will make it completely transparent to consumers.
* Leverage Anywhere Consumers: Record labels should encourage consumers to become legitimate distribution channels themselves and enable them to profit from it.
* Promote PC, not the phone: Wireless carriers must aggressively push the PC rather than the phone as the digital music distribution channel. The PC dominates music downloads.