• by Mark Walsh  @markfwal, November 21, 2007

Digital music won't save the recording industry, according to a new study.

Despite the growth of digital spending to one-third of the U.S. consumer music market by 2012, it won't be enough to offset the decline in CD sales, according to JupiterResearch, a New York-based research company.

The study projects that digital music sales, including subscription services and downloads, will triple to $3.4 billion in 2012 from $1.04 billion in 2006. Digital sales this year are expected to hit $1.3 billion. But gains in the online business aren't expected to reverse the industry's overall slide--with total revenues estimated in 2012 at $10.1 billion, down from $11.6 billion in 2006.

"Digital music won't be enough to restore growth for the industry or replace the lost CD sales of the past," according to the report authored by Jupiter research director David Card. "But it's the only sector where there's significant growth."

Digital sales haven't replaced CDs on a one-to-one basis because on-demand subscription services appeal only to a niche audience of serious music fans, while downloads generally amount to only a few a year. Online spending geared toward singles priced at 99 cents each can't make up for the declining dollars spent on albums priced at $13 or $14 apiece.

"Everybody listens to music...but a lot of people don't spend a lot on music," Card tells Online Media Daily.

The study doesn't envision advertising playing a big role in online music anytime soon. On one hand, users say they would prefer an ad-supported on-demand music service to a typical subscription model that charges $10 to $15 a month. But Jupiter finds that existing licensing practices make ad-driven music ventures difficult. "It's hard to imagine anyone selling $8 to $10 worth of ads per user per month, when there is hardly any audio advertising online," according to the report.

SpiralFrog, the most high-profile ad-supported music effort, launched last August after a series of delays and the departure of then-CEO Robin Kent. On Tuesday, privately held SpiralFrog reported a third-quarter loss of $3.4 million on revenue of just $20,400. In exchange for free tunes, users view advertising on the site while downloading music. But SpiralFrog so far offers only about 800,000 songs compared to other services such as iTunes and Rhapsody, which have at least 2 million songs each.

"There's no question in my mind that there will be an ad-supported business model that will emerge eventually, but not one that will emerge right away to make up for declining CD sales," Card says. The report notes, for instance, that Rhapsody and Napster have both introduced limited ad-supported offerings to lure new customers.

Despite the challenges, the study encourages music labels and publishers to seek out new licensing revenue streams through advertising and ringtones, as well as both online and terrestrial digital radio. "The industry needs to work hard on these things and experiment boldly, because artists have to get paid at end of the day," Card says.