CD sales drop, digital downloads on the rise

The number of Internet users paying for digital music increased by just over 8 million in 2008 to 36 million Internet users, and purchases of online digital music downloads increased by 29 percent since last year, accounting for 33 percent of all music tracks purchased in the U.S., according to market research firm The NPD Group.

All that comes at the expense of almost 17 million fewer CD buyers in 2008 compared to the prior year, according to NPD's Digital Music Study, an annual tracking study covering the music industry.

The decline in CD buyers cuts across all demographic groups, but was particularly focused on teens and consumers age 50 and older.

"Rising incidence of paid downloads is a positive development for the industry, but not all lost CD buyers are turning to digital music," said Russ Crupnick, entertainment industry analyst for The NPD Group.

But the economy is hurting discretionary spending, too: according to the study, there were 13 million fewer music buyers overall in the U.S. last year, compared to the prior year. The decline in music purchasing was led by a 19 percent drop in CD sales.

Only 58 percent of Internet users reported purchasing CDs or digital music downloads last year, versus 65 percent in 2007.

However, among the reasons consumers cited for preferring digital music over CDs was that they could choose only the songs they wanted to purchase, and could immediately download and listen to their purchases.

On the other hand, there is evidence that music listening is increasing: awareness and usage of Pandora, a leading online radio station, doubled year over year to 18 percent of Internet users; one-third of those who were aware of Pandora report using the service. Similarly, the percentage of consumers claiming to listen to music on social networks (such as Last.fm, which is owned by ZDNet's parent company, CBS) climbed from 15 percent in the fourth quarter of 2007 to 19 percent in Q4 2008.

Nearly half of U.S. teens are engaging with music on social networks, which is an increase from 37 percent a year ago; among college-age Internet users, the percentage increased from 30 percent in 2007 to 41 percent in 2008.

The challenge, of course, is to figure out how to monetize the shift in demand.