Sector Insight: Music and DVD retail - High-street sales fall foul of web

their ranges with aggressive price promotions. By contrast, DVD sales
have posted a 13% rise in sales in the past five years, though this has
not been enough to save many retailers. Only two brands - HMV and Zavvi
- remain, and both are being forced to adapt their business models.

Last year, the headline-grabbing music releases were not necessarily
those that sold the most, but rather those that didn't sell any.
Prince's concert at The O2 in London was accompanied by a give-away of
his latest album with the Mail on Sunday, while Radiohead let fans
decide how much to pay for their album In Rainbows.

This may have given some record company and retail bosses nightmares,
but music-lovers were delighted, and the incidents illustrated wider
changes in the music industry.

For music retailers, 2007 was not such a good year. Sales of
pre-recorded music totalled £1.47bn in 2007, according to Mintel,
a 29% drop on 2002. CD albums fared worst, with sales dropping from
£1.9bn in 2002 to £1.2bn last year.

This could easily be attributed to the growth of downloads. While they
have helped to boost singles' sales, they still make up only a small
part of the market, with single and album downloads accounting for about
4% each.

By contrast, DVDs have retained their appeal for consumers, and sales in
the sector have increased by almost 13% since 2002, to reach £2.1bn last year.

Consolidation among retailers was rife in 2007. Music Zone went into
administration, with Fopp picking up 67 of its 100+ stores, only to
collapse itself in July last year. Trading has also suffered at the
bigger specialists, with HMV and Zavvi the only ones left in
business.

However, they are adapting their business models to face the challenges,
according to Nick Gladding, lead analyst at Verdict Research. 'While
piracy will continue and CD volumes will decline further, retailers are
now better-placed to cope with market challenges,' he says.

HMV is the market leader with more than 230 UK stores, which it is
currently overhauling. It is also bolstering its online presence.
Despite this, research shows that while HMV is popular among 15- to
19-year-olds, older consumers are less likely to shop there.

Virgin Megastores became Zavvi following a management buyout in 2007.
The brand is seeking to establish itself on the high street in difficult
times, and while Christmas trading was buoyant, this was largely the
result of video games sales, while takings from music dropped.

The retail environment is changing. Specialists account for about 40% of
music and video sales, but face stiff competition both from websites
(20%) and supermarkets (27%). Illegal downloads through peer-to-peer
(P2P) sites are also a factor, with the BPI estimating that their cost
to the industry is £400m a year in the UK alone.

Online retailers such as Amazon.co.uk and Play.com have the benefit of
extensive ranges, as well as competitive prices. Amazon's user-friendly
website has attracted a broad UK customer base, but while US customers
can download paid-for entertainment content via Amazon, British
customers do not yet have access to this service, leaving iTunes the
dominant player in this area.

Several supermarkets have expanded their non-food categories. Tesco and
Asda, in particular, have begun to stock greater ranges of CDs and DVDs,
backed by price promotions.

The good news for retailers is that the 25- to 34-year-old age band - a
key demographic for this sector - is growing. In addition, continued
growth in broadband take-up will drive the market for downloads.

Meanwhile, prices for both CDs and DVDs are falling as competition from
supermarkets and the internet bites. In many cases, consumers are
bypassing payment entirely by turning to P2P sites. While the industry
looks for ways to halt this practice, younger consumers in particular
are rapidly becoming accustomed to the concept of free content.

By 2012, Mintel predicts that the pre-recorded music market will have
dropped 27%, though the decline will be less sharp than in the previous
five years. Downloads will take a bigger share of the market, rising
from 8% in 2007 to a forecast 19% by 2012. However, the issue of digital
rights management (DRM) still has to be resolved to encourage more
consumers to adopt this mode of music buying.

The video and DVD market is expected to grow by 3% over the same period,
to reach a value of £2.3bn. The next few years will be interesting
times for this market, as high-definition discs start to take hold as
more consumers adopt emerging technologies.

Moreover, now that Blu-ray has won out over HD DVD in the battle of the
formats, the choice has become simpler for consumers, although the need
for a costly high-definition TV set is slowing take-up in this
sector.

On the music and DVD retail market as a whole, Gladding concludes: 'Once
the dust has settled, with new players in place and weaker operators
shed, the market will emerge renewed and rejuvenated, better able to
take on the challenges presented by the next generation of
consumers.'

ESTIMATED PRE-RECORDED MUSIC SALES BY FORMAT



2007 2006 2005 2004 % change

pounds m pounds m pounds m pounds m 2004-07



Single downloads 57 48 23 4 1425

Physical singles 27 41 67 85 -69

Total singles 84 89 90 89 -6

Physical albums 1221 1463 1640 1760 -35

Album download 66 22 15 1 6600

Total albums 1286 1485 1655 1761 27

Music DVD 102 94 103 100 2

Overall total 1473 1667 1847 1949 24.5



Source: BPI/OCC/Mintel





MUSIC AND VIDEO MARKET BY SHARE OF CATEGORY AND HOUSEHOLD SPEND



Year Share of Share of

recreation household

and culture expenditure

% %



2002 5.0 0.60

2003 5.1 0.62

2004 4.9 0.60

2005 4.4 0.55

2006 3.9 0.48

2007 3.6 0.43

Change 02-07 -1.4 -0.20



Source: BVA/Mintel





MUSIC SALES DISTRIBUTION CHANNELS BY VALUE AND SHARE, 2007



Rnk Sales Share

(pounds m) (%)



1 Specialists 604 41

2 Grocers 395 27

3 Internet 295 20

4 General-merchandise

and variety stores 133 9

Others 45 3

Total 1473 100



Source: BPI/Mintel

ANALYST COMMENT - ANNA CLARK, SENIOR RESEARCH EXECUTIVE, GFK NOP

There has been much talk of late about record companies struggling to
hold on to big-name artists, who feel they can go it alone using digital
technologies, but is this really indicative of how the market is
faring?

GfK NOP's Roper Reports Worldwide online survey of internet users found
that 62% of UK consumers made their last music purchase, whether
physical or digital, online; the highest proportion in any of 17
countries studied.

Music was the second-most common online purchase behind travel
reservations, suggesting that the channel appeals to those purchasing
products they don't need to see first, and are likely to have decided to
buy in advance. This makes competing with the internet difficult for
high-street retailers.

In line with the continuing popularity of the iPod, half of the sample
had used an MP3 player in the past month, including 35% of 50- to
59-year-olds and more than 20% of the 60-plus age group. However, even
among these consumers, CDs still dominate. When asked what music they
had bought in the past six months, over half (55%) included 'CDs bought
online'; 'CDs bought in a store' ran a close second at 53%. Only 28% had
purchased digital music online, and 21% had obtained it through
peer-to-peer file-sharing networks.

It would seem that the CD cannot be dismissed as outdated, as it offers
consumers a physical product, as well as the freedom to transfer tracks
to MP3 players.

Considering that almost half of the survey respondents had bought CDs
in-store in the past six months, perhaps the high-street entertainment
retailer should not be consigned to the scrapheap just yet either.