Study: Kazaa, Morpheus rave on

Digital distribution of music through services such as Morpheus and Kazaa will continue to thrive, with use peaking in 2005, according to a report released Wednesday.

The Yankee Group predicts 7.44 billion unlicensed audio files will be swapped in 2005 among consumers aged 14 and older, up from 5.16 billion in 2001.

After 2005, however, Yankee predicts free music swapping will begin to decline. Yankee projects 6.33 billion unlicensed audio files will be swapped in 2006.

If Yankee's projections are right, it could be bad news for the recording industry, which has been launching its own pay services and working to thwart unlicensed music swapping. The entertainment industry is also pondering legal moves against individuals.

According to the Recording Industry Association of America (RIAA), Internet piracy of music has shaved 5 percent from music sales in both 2001 and 2000. Although the declines can be attributed to other reasons, Yankee said, unlicensed music swapping is "certainly a significant contributing factor."

In a separate report, Forrester Research disputed the RIAA's claims and, like Yankee, noted the music industry must make it easier for people to find, copy and pay for music over the Internet.

Forrester also concluded that pay services will likely take off in about 2005, with digital music delivery accounting for 17 percent of sales in 2007.

Yankee analyst Michael Goodman said it would take a few years for the record industry to develop an Internet business model that works.

"It?s a question of a number of factors falling into place," Goodman said. "All five (major) labels and the independents have to be signed for digital services and that?ll take some time."

Goodman said the business deals and the products will be in order by the end of 2003 but then consumers must be enticed to leave free services, a process that will "take another couple years."

Given the record industry's penchant for retaining control over music distribution, Goodman predicts it won't be until 2006 before pay services make a dent in unlicensed distribution. Indeed, services such as Pressplay have gotten off to a tepid start.

Goodman said the music industry is at a crossroads where it can either continue to lose sales or embrace digital distribution. It's no coincidence that retail music sales peaked in 1999 at $14.6 billion on 1.2 million units sold and then declined with the introduction of Napster.

"In the end, the record labels will have to share control of the content with the consumer," said Goodman. "This philosophical shift will not come quickly or easily to the record labels. Nor will consumers quickly adopt fee-based file-sharing services."

Yankee projects 500,000 consumers will subscribe to licensed music, services generating $21.7 million in revenue in 2002. Once the music industry works out a business model, subscribers will grow to 65.6 million, generating $5.8 billion in revenue by the end of 2007.

Among other findings in the report:

In a survey of 1,400 consumers, Yankee found that that 11 percent said they would be very interested in legitimate music download service, with another 22 percent describing themselves as somewhat interested. Interest among broadband subscribers is higher, with 46 percent responding that they were very or somewhat interested in a music download service.

Consumers who listen to music on MP3 players are more interested in legitimate download services, with 25 percent saying they were very interested and 23 percent checking in at somewhat interested. Consumers with CD burners were the least interested with 34 percent being either very or somewhat interested.

When consumers were asked whether they'd pay $6.95 a month to download 20 songs, 26 percent fell into the interested category. Among broadband users, 35 percent were interested.

Teens are among the most avid music consumers with 64 percent of 16- and 17 year-olds downloading music. That is followed by 47 percent of people 18 to 34 years old and 33 percent of those 35 to 49 years old. Those demographics, however, present a "fundamental question of how legitimate music services target the consumers who are the most likely to download music, if they don?t have a credit card," Goodman said.