Digital Passes Physical

Reported for the first time, digital music sales passes CD sales. Atlantic Records, a subsidiary of Warner Music Group, announced digital sales made up more than half of its revenues (51%) during the fourth quarter of 2008.

Digital revenues are made up of sales of MP3s (like those sold at Apple’s iTunes Store), ring tones, itunes7_storeringbacks, satellite radio and subscription services.

While this is very significant, the New York Times makes the point that Atlantic Record’s situation “is [still] sharply at odds with the trends in the music industry over all, where data show that sales of compact discs still account for more than two-thirds of music sales. Forrester Research does not expect digital music to reach 50 percent of the overall pie until 2011.”

This shift at Atlantic Records proves to the music industry that the move from physical to digital is real. Major music labels can no longer completely rely their old ways to generate revenue. Companies now, more than ever, need to embrace the digital space both in terms of distribution as well as marketing and promotion.

As CD sales begin to fall to digital sales, so do overall revenues at the record labels. Consumers have traded $12.99 CDs in for $0.99 MP3 singles. This forces labels to put much more of an emphasis on ancillary deathmagneticgoods; products outside of the actual music. A great example of this is Metallica’s Death Magnetic Coffin Box Set sold on the website for $139.99. The Box Set includes the “CD along with a bonus CD with demos, DVD with more making of footage, a flag, guitar picks, fold out poster, a T-shirt, and a free download of the Berlin or London Death Magnetic Release Party.”

Music labels must be flexible to be able to adapt to this changing marketplace. They need to think in new ways about distribution (TopSpin), marketing and new revenue streams. While the labels are not making as much money on digital formats, they are cutting costs of producing and distributing CDs.

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