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Music Sales Slide Despite Napster Demise

U.S. album sales have declined in the first half of the year, despite the demise of song-swap service Napster, which the recording industry claimed would depress sales and hurt their bottom lines.

According to New York-based SoundScan, which tracks music retail trends, sales of current albums – recordings released less than 18 months ago – have fallen about 8 percent year-to-date, while sales of all albums fell about 2.8 percent.

Many music company officials shrug off the decline, blaming it on a lack of mega-hits and a slowdown in the economy. Many also predict the trend will improve in the historically stronger second half of the year.

Nevertheless, several industry insiders predict more job cuts at the major labels. Warner has already let go hundreds as a result of the America Online/Time Warner merger and Bertelsmann AG’s BMG Entertainment, which is expected to lose more than $150 million for the year ended June 30, is said to be drawing up plans to lay off hundreds of employees to cut costs and boost its bottom line.

Results released by AOL Time Warner Inc.’s Warner Music on Wednesday reflected the current market state as the recording giant reporting a 33 percent slide in second-quarter earnings before interest, taxes, depreciation and amortization to $87 million.

The nation’s leading music retailers are also showing a decline in sales and Moody’s Investors Services in June downgraded $110 million of Tower Records’ debt, saying the retailer was likely to file for bankruptcy if it could not find a new source of capital or repay banks within the next few months.

Despite the gloomy landscape, Warner officials on Wednesday remained upbeat. “We are looking for music to rally strongly in the second half and not only to be up third and fourth quarter, but I am not going to be surprised if on a year-over-year basis music ends up slightly positive,” Dick Parsons, AOL Time Warner’s co-chief operating officer, told analysts Wednesday.


Parsons said the group has a heavy slate of releases set for the second half of this year, including several soundtracks and releases from Kid Rock and Jewel. Parsons also said that investments in emerging artists like Eden’s Crush and Missy Elliott will begin to pay off in the second half.

“I’m optimistic that our year-end figures will even out as our numbers in the third and fourth quarters will reflect great products being distributed between now and then,” said Hilary Rosen, president of the Recording Industry Association of America (RIAA), a trade group for all the major labels.

The RIAA will release its half-year figures in August.

Meanwhile, several analysts did not want to discount the Napster effect entirely. While the recording industry managed to cripple Napster with a landmark copyright lawsuit, they say the service likely has had a potential impact on sales as former Napster users – many of which were avid music buyers – have moved over to other free services.

Napster, which enabled fans to swap songs for free, has seen usage grind due to a halt due to an injunction issued on March 5 barring it from offering copyrighted songs on its services.

“Despite the shutdown of Napster there are various alternatives on the Net that seem to be attracting the former Napster users,” Phil Leigh, vice president of Raymond James & Associates.

“Our research indicates that the proliferation of CD ‘burners’ is at least as important a factor affecting the propensity to buy new CDs,” he said.

There are currently over 50 million CD re-writeable drives in use, with industry experts predicting there will be over 100 million after Christmas.

“Even though the old Napster service is dead, consumers are now familiar with what digital files are and how to rip MP3s, which means that alternative file sharing services will continue to rise in popularity,” said PJ McNealy, analyst with GartnerG2.

Napster, meanwhile,, has long maintained that Napster has actually spurred sales by exposing listeners to music.

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