Say goodbye to the strong digital growth rates. A Billboard analysis of 2009 SoundScan data shows a digital slowdown has arrived. In terms percentage and unit change, digital sales growth slowed immensely last year after three years of steady gains.

While SoundScan considers 2009 to have 53 weeks, previous years obviously had 52 weeks. For comparative purposes, we can look at year-to-date numbers through the week ending December 27. The year-end numbers will be released today.

As the graph below shows, annual changes in digital album and track sales have fallen sharply in the last two years. In other words, there are fewer additional tracks and digital albums purchased each year. To be sure, the changes are positive, not negative. But growth is disappearing. From 2006 to 2008, annual sales of digital tracks rose between 225 million and 229 million units. In 2009, unit growth fell to 90 million. A similar but less drastic trend is seen in sales of digital albums. From 2006 to 2008, digital albums grew between 15.7 million and 17.5 million units per year. In 2009, digital album sales gained only 10.4 million.



With ringtone sales falling and ad-supported revenues far below expectations, growth in download sales had been the one bright spot for the record industry. Now, growth has slowed to a crawl and, barring an immensely successful new product or service, could plateau by 2011. As I noted in September, digital revenue growth has been slowing lately. “Since new music stores and services get so much attention,” I wrote, “digital is seen as the bright spot in the music business. But digital is not just maturing, it may be getting stuck in a rut.”

There were a number of signs that digital gains had slowed. The summer of 2009 was softer than previous summers; ringtone sales had fallen 23% through the end of August compared to the same period in 2008. The high growth of digital tracks had disappeared.

Take note of two important trends regarding track sales:

First, in the 52-week period ending December 27, track sales were only 8% higher than the same period in 2008. That 8% increase follows annual growth rates of 26.7% in 2008, 45.1% in 2007 and 65% in 2006. Since track sales account for most of the tracks sold online (they generate more revenue than digital albums), changes in demand for tracks carry serious implications. And as already explained, absolute gains are falling as well. Only 80 million additional tracks were sold in 2009. That gained revenue is a far cry from the revenue lost when 64 million fewer CDs sold last year.

Second, digital sales really slowed down in December. Combined tracks from sales of individual tracks and digital albums (using 12 tracks per album for calculations) were up only 0.4% in the first four weeks of December. Slight gains in digital albums were canceled out by losses in digital tracks. Track sales were down 3.8% during the period. Sales in Christmas week 2009 were 6% lower than Christmas week 2008 and only 4% higher than Christmas week 2007. Year-over-year track sales were down 6% the week before Christmas as well. Digital albums had a better, albeit lackluster, first four weeks of December. Unit sales during the period rose 6% and Christmas week sales were 7% higher than the previous year.

Sales increases in the Christmas and early year periods are functions of gift cards and new hardware ownership. One of the two could be behind the sales drop. As I wrote in October, the strong link between download sales growth and new hardware ownership appeared to be over. As millions of new iPhones and iPod touches were being sold, download sales – of which Apple accounts for a vast majority – were flattening out. In addition, I have frequently warned of the potential harm to downloads that can be done by new music services. There are many free and cheap options to buying music. It makes sense that download sales could suffer as a result.

One important caveat is prices carried by hit tracks. The $1.29 price tag carried by hit songs at iTunes is one reason track sales are down. However, the combination of the price increase and the slight resulting slight drop in sales has meant total revenue from these hits has increased. Even so, track sales have slowed since prices rose in early May. There is more behind the sales slowdown than higher prices.

Questions? Comments? Let us know: @billboardbiz

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