Crash and burn

When it was introduced, the compact disc helped bail out the music business: Domestic sales of the new technology zoomed from 800,000 copies in 1983 to 288 million by 1990, and continued to surge by the hundreds of millions through the ’90s. But with March marking the CD’s 20th anniversary, the boom is over. Compact disc shipments in the U.S. plunged nearly 9 percent last year to just more than 800 million, according to the Recording Industry Association of America (RIAA). The statistics confirm a downward trend that has been gaining steam since 2001, and continues this year, with CD sales down more than 6 percent from their already slack 2002 pace.

The ripple effect is only beginning as the music industry braces for a future that will involve the death of CD stores and the rise of wireless, pocket-size MP3 players that will enable consumers to access thousands of hours of music at the touch of a button. The only real question is how long it will take for those scenarios to become reality.

“You’ll see CD sections in stores decline quickly over the next few years because they will be replaced by technology that provides dirt-cheap storage and the ability to basically access and play any type of music record-store chain. “Wireless technology basically will create a world where we can have anything we want all the time.”

The death knell is already ringing for CD stores, some retailers and industry observers say. In January, two major chains — Warehouse Entertainment and Value Music — filed for Chapter 11 bankruptcy protection. And nearly 500 music specialty stores nationwide have been shut down in recent months.

“Brick-and-mortar specialist CD stores are done in five years,” Dreese says. “Stores like Tower or Sam Goody or Virgin are fast becoming anachronisms.”

Not so fast, says Dan Hart, CEO of Echo, a joint venture of retailers (Best Buy, Tower Records, Virgin Entertainment, Warehouse Music, Hastings Entertainment and Trans World Entertainment) that is licensing songs from labels and plans to begin offering in-store downloads this year. Internet retailing was one of the few growth areas for music stores last year, with sales up 8.4 percent to 8.1 million units, according to Nielsen SoundScan.

“There’s no question CD sales are declining, but the phase-out of retail will take longer than people predict — it’ll be more like 30 years rather than five,” he says. “There is a whole generation of people out there educated to using CDs as their primary music format.”

But even Hart says that to retain a role in the marketplace, CDs will have to evolve.

For two decades, record companies bathed in profit, thanks to the compact disc. The rise of the new digital technology prompted many labels to reissue their long-neglected back catalogs on CD: Bands like the Beatles, Rolling Stones, Aerosmith and The Who made millions of dollars for their respective labels simply by having their past albums transferred to the new digital format, sometimes several times over. The shelved work of artists such as Bob Dylan, Eric Clapton and Robert Johnson was repackaged in multi-CD box sets, and sold millions of copies.

But in the last three years, the bottom fell out of the CD market. Why the sudden decline in what had been an industry staple? The RIAA blames Internet “piracy”: file-sharing by consumers is proliferating, with millions downloading free MP3 music files daily through services such as Soulseek and KaZaa. MP3 files are digitally encoded files that can be downloaded from the Internet, posted on a Web site, sent via e-mail or stored on a computer hard drive and then played back or transferred onto blank CDs. KaZaa alone claims more than 9 million monthly users. Six of the leading free file-sharing applications were being used by 14 million consumers a month in a recent comScore Networks analysis.

Sales of blank CDs soared past the 1 billion mark worldwide in 2000 and increased 40 percent last year. Illegal CDs — often manufactured and copied on personal computers from free Internet downloads — are now routinely sold for a few dollars in school lunchrooms and on playgrounds, and are available on street corners from New York to Hong Kong.