Last week, two market research reports were released that forecast the trend of recorded music revenues. The reports are notable for two things: the dates when digital-physical equilibrium will be met and the errant forecasts of their predecessors. Forrester predicted physical revenue would match digital revenue in 2012. Two years ago, Forrester predicted digital would match physical in 2011. eMarketer predicted the equilibrium will be reached sometime this year.

Why the difference? Two different definitions of what comprises digital music and different expectations for the erosion of physical revenue.

The revenue estimates in Forrester’s “U.S. Music Forecasts, 2009 to 2014” did not include ringtones or ringback tones. (This is eMarketer included everything -- CDs, LPs, downloads, music streaming and ringtones -- in its report, “Paid Music Content: The Answer is Blowin’ in the Wind.” Thus, Forrester’s digital revenue estimates are lower and will take longer to catch up with declining physical revenue.

Another key difference -- and a reason why eMarketer’s date of equilibrium arrives earlier -- is that eMarketer is much more pessimistic than Forrester on physical sales. The lower your prediction for physical revenues, the sooner digital revenues will catch physical revenues.

EMarketer predicts physical product revenues will fall to $960 million in 2013 from $4.3 billion in 2009. It forecasts physical revenue declines will actually pick up speed in the next four years: -25% in 2010, -28% in 2011, -32% in 2012 and -35% in 2013.

For those forecasts to prove true, retailers would have to pull out of the CD business at an increasingly higher rate. It should be noted that experts have typically overestimated the rate at which CD sales will drop. There has not been a metaphorical cliff from which the CD has fallen. Sales have fallen pretty consistently over the last four years -- about -20% per year.

In contrast to eMarketer, Forrester sees the decline in physical revenue slowing down in the coming years growth rates of -18% in 2010, -15% in 2011, -14% in 2012 and -13% in 2013. The implication here is that Forrester does not believe major retailers will make drastic cutbacks in CD inventories or get out of the CD business altogether. Nor do these growth rates imply that record labels will refuse to make concessions to retailers in order to keep their business.

A slowing negative growth rate implies today’s retailers will stay with the CD, labels will stay committed to the format, independent retail will continue to support the format consumers will continue to drift away from the format. Given the realities of the marketplace (people still like CDs, labels know they must accommodate concerned retailers), this is a more believable forecast of physical revenues.

If anything can be said of analysts’ predictions over the years, it is that they have been more right about physical declines and more wrong about digital growth. Put simply, digital revenues have not grown as fast as experts have expected. As a result, forecasts have had to change over the years.

In Forrester’s latest report, it has extended its predicted date of equilibrium. In February 2008, a Forrester report predicted equilibrium would occur in 2011 -- a year earlier than its most recent forecast. (That report said digital downloads alone would surpass CD sales in 2012. Take out subscriptions, Internet radio and other online services and digital will take even longer to catch CD sales.)

A component of that digital growth was social networks. “DRM-free music enables every profile page on MySpace or Facebook to immediately become a music store where friends sell friends their favorite tracks,” said Forrester. As it turns out, social networks have become a great place for free streams, not downloads that are bought and sold. This revenue stream was an important part of Forrester’s forecast, and it has not yet come to fruition.

Subscriptions is another revenue stream that has been difficult for experts to target correctly. Strong growth was expected but has yet to materialize. In late 2008, Forrester’s David Card predicted 20% annual growth in subscription revenue for the next five years. A new generation of services may be able to tap that demand, but what services existed a year or two ago had little chance of meeting expectations. As I wrote in August 2008:

Analysts, I believe, are right in one aspect of their assessment: broad demand for subscriptions exists. But it's a latent demand, meaning current products will not satisfy the demand. If that 20% growth materializes it will likely come from a new generation of mobile subscriptions. If mobile subscriptions (think Nokia's Comes With Music) gain traction and even come close to expectations, growth will be more than 20% per year. If in the coming years the subscriptions category includes ISP-based services (fixed number of MP3 downloads for a monthly fee) then subscriptions definitely have growth potential exceeding 20% per year…

Analysts have been overly optimistic with their forecasts this entire decade -- and regularly tone down their forecasts. JupiterResearch has already lowered its January 2007 growth estimate from the 32% annual growth rate it predicted for 2007-2011. In November of 2005, Jupiter was saying subscriptions would come in at $250 million for the year. In 2002, Forrester forecasted 2007 subscription revenues at $313 million (to be fair, a forecast that far in advance is hard to get right).

Analysts have long forecast strong digital growth. In April 2008, In-Stat released a report that predicted digital downloads (not all digital revenues, but just downloads) would account for 40% of global music purchases in 2012. Given the diverging trends (download sales are slowing, streaming revenues are growing), In-Stat’s forecast appears to be an errant one. In late 2006, iSuppli forecasted 40% of global recorded music revenues would come from digital by 2010.

Even at the time, I said that was too high an estimate. In reality, a global 40% digital share is many years away. The IFPI estimates digital accounted for 20% of global recorded music revenues in 2008. That was up from 15% in 2007.

Ironically, perhaps the best forecast I have seen was made by Alain Levy in October of 2006. Levy, then the Chairman and CEO of EMI Music, predicted digital would account for 25% of the company’s revenue in 2010. I don’t know what EMI’s digital-to-total revenue ratio is, but Warner Music Group’s global digital was 25% of total revenues in fiscal 2009 and domestic digital revenue had a 35.6% share (up from 28.1% in fiscal 2008).