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Why 2011 Is the Year Digital Music Broke, by the Numbers

2011 could end being the year digital music broke. Yes, the iTunes Music Store launched back in 2003. But 2011 has been a truly incredible year for digital music. Perhaps most important is the big improvement in download sales. This year's increase in digital downloads could result in around $300 million of incremental consumer spending by the end of the year, based on Billboard estimates using Nielsen SoundScan data.

There's a common -- and incorrect -- belief in the music business that nobody pays for music anymore. That claim just doesn't hold water in 2011. Through September 25, the increase in track and digital album sales has a value of about $236 million (calculated simply using $1.29 for tracks and $9.99 for digital albums). American consumers have purchased an additional 12 million digital albums and 90.5 million tracks on top of what they had purchased at the same point in 2010.

On a prorated basis, that works out to a full-year gain in revenue of $314 million (calculated using a ratio of year-to-date-to-full-year sales for both track and digital album in 2010). The gain is split almost evenly between digital albums and tracks. One important asterisk: it does not take into account the debut of the Beatles catalog at iTunes in the fourth quarter of 2010. That factor alone may have skewed the calculations.

 

It's quite a turnaround. Through September 26, 2010, digital track sales were actually 43.3 million units lower than the same point in 2009 while digital albums were up 4.8 million units. Taking into account a gain in the average track price, which helps offset the unit decline, the year-over-year gain in revenue was probably $100 million at best.

This has been a great year for music streaming services, too. Internet radio company Pandora had a successful stock IPO, surpassed its 100 millionth registered user and currently has a market capitalization of $2.1 billion. Clear Channel launched its own personalized Internet radio service earlier this month. And on-demand music service Spotify made its US debut in July and now has 2 million paying customers in eight countries, the company's CEO said last week. Rdio, Mog and Rhapsody have also put forth very good products for consumers who want to move their music collections to the cloud.

Startups have brought much-needed excitement to digital music, too. Turntable.fm came from nowhere to become a darling of the music and tech industries. Other non-interactive services have altered the landscape, too. Mixcloud, Shuffler.fm, 8tracks, Songza and others have introduced new ways to discover and enjoy music. Best of all, these services operate under the DMCA's statutory license for webcasters and don't need to acquire licenses from labels. As a result, there is nary an impending lawsuit between the bunch of them.

Improvements in subscription and non-interactive services are important stepping stones to a vibrant digital future. For an industry that wants growth right here and how, however, it's hard to ask for more than a $300 million improvement in download spending.

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