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Why Digital Distribution Rocks Entertainment


Change is the name of the game for the entertainment industry. Don't like the new reality? Too bad, because there's more to come. Music, movies and video games are facing economic challenges due to the disruptive influences of digital distribution.

"The music industry was knocked off balance by the emergence of the MP3 in the late 1990s and has not recovered, and Hollywood's two core businesses, box-office receipts and DVD sales/rentals, have stopped growing," says Paul Verna, eMarketer senior analyst.

While the sales of video game consoles and software titles remain relatively strong, the industry's future is shifting to digital distribution and ad-supported models.

Spending on CDs and other physical sound carriers dwindled to $5.8 billion in 2008 -- down a very significant 60 percent from a peak of $14.6 billion in 1999. In 2009, the U.S. recording industry will mark 10 consecutive years of declining CD sales.

U.S. sales of recorded music will drop to $5.52 billion in 2013. This downward trajectory will extend a pattern that began in 2000, when physical sales started to decline after rising dramatically during the rise of the CD.

"Online will experience healthy growth, mobile will trend slightly downward and physical will continue to plummet at accelerating rates," says Mr. Verna. "Unfortunately, the sum of online and mobile will not compensate for losses in physical, but it will slow down the rate of those losses to a 2.9 percent drop in 2013."

In 2008, single downloads made up the bulk of digital music sales, over $1 billion -- ironically, that's the revenue stream that initially the recording industry attempted to terminate in a very public battle with their primary consumers.

An NPD Group survey revealed a nexus between music and social media, finding that the percentage of U.S. teens who downloaded (for a fee) or listened to music via social networks increased from 26 percent in 2007 to 46 percent in 2008.

"Clearly, this is a period of experimentation for the music business and social media," says Mr. Verna. "The next step for these services will be to broaden their offerings into a user experience that straddles platforms and devices."

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