Business Matters: Reports of the CD's Death Were Greatly Exaggerated

Even though CD revenues have fallen sharply over the last ten years, most predictions about the format have been wrong. The CD's decline, while painful to companies, has been far more gradual than precipitous. Over the last four years, CD revenues have leveled off just as an airplane would before a soft landing.

The one thing everybody has correctly predicted is that the CD would decline. CD revenues fell 77.5% to $2.5 billion in 2012 from $11.2 billion in 2003, according to RIAA numbers released last week. The deepest losses occurred in 2007 and 2008, when CD revenues dropped over $1.9 billion each year. Total revenues suffered badly as a result in those years, falling 9.4% and 17.6% in 2007 and 2008, respectively. More recent years have not been as bad. After four straight years of deficits that exceeded 20% (from 2007 to 2010) CD revenues declined 8.5% in 2011 and 18.3% in 2012.

But, contrary to many predictions, there has been no cliff. In fact, the CD occasionally shows signs of stubbornness. Of the 969,000 units sold of Justin Timberlake's The 20/20 Experience in its first week of release, 53% were CDs and 43% were sold as mass merchants, according to Nielsen SoundScan. Sales undoubtedly benefitted from Target securing an exclusive two-CD set of the album with two exclusive tracks. Sixty-one percent of first-week sales of Taylor Swift's Red were CD sales. Nearly half (48.7%) of those sales came from mass merchants and 5.8% came from non-traditional retailers. Where there is a marketing partnership, there is an opportunity for the CD to shine.

Of course, these are industry-wide numbers. The fall of the CD will vary from company to company. A label without access to chains and mass merchants will likely get a higher percentage of revenue from digital sales than a label with a roster that gets radio play and has a roster of well known artists. A small label has indie stores and Amazon. A big label has Walmart, Best Buy, Target and all the others.

There is a bright side here. As years pass, there is less CD revenue to lose and deficits become more manageable. A 21.5% decline in 2009 equaled a loss of $1.2 billion in revenue. Last year, the 18.3% decline represented just $569 million in lost revenue. The smaller an annual loss in CD revenue becomes, the easier it will be for revenue from downloads, ad-supported streaming services, subscription services and vinyl sales to cover the difference. Last year, the gains in the latter four categories almost covered the $569-million drop in CD revenue as total recorded music revenues were down 0.9%.

It's arguable that the CD will ever go away completely -- at least within the next decade or two. Even if CD revenue drops 20% a year, the format will still have $217 million of revenues in 2023. That's not much, but it's over $50 million more than the $163 million done by vinyl records last year. As long as there is demand and there are manufacturers to fulfill that demand within a reasonable cost, expect to see the CD around for many more years.