Though, at present, legal digital downloading remains a relatively small market at GBP112 million, the report forecasts spending will swell to almost GBP0.5 billion by 2011.
Over the past year digital downloading has really started to capture the imagination of customers. The increasing availability of high speed internet access is encouraging more consumers to experiment, downloading songs to their MP3 players using the ever increasing number of new site becoming available. Looking ahead, as well as continued growth of music downloads, Verdict forecasts significant growth in video downloading.
Tough market conditions
The last two years have been immensely challenging for music & video retailers. Following a 5.0% fall in spending in 2005, the market is on track for a further decline of 1.7% in 2006.
The source of this market weakness is a significant downturn for DVD. Following five years of double digit growth, the video market tumbled into sharp decline in 2005. The performance was affected by a particularly weak release schedule, but it was also impacted by two more deep-rooted causes. First, the release of back catalogue titles to the market slowed significantly as the list of unreleased titles dried up. Secondly, many consumers started to lose interest in collecting DVDs following years of frenzied purchasing since 2002 when DVD hardware really took hold of the mass market.
The plague of piracy remains the music & video market’s biggest issue. While bootlegged copies of CDs and DVD continue to erode retail sales, illegal digital downloading has grown to become a substantial problem. Despite attempts to curb its advances, digital downloading has been fuelled by increasing availability of cheap high speed broadband Internet access. And while illegal sites are closed on an ongoing basis, new sites quickly appear in their place as new technologies progress or as new legal loopholes are exposed.
Deflation has also been a major drag on the market over recent years. The music & video market has been deflationary since 2000, when grocers and online specialists began to seriously ramp up their price-led offers. While grocers and online players’ price falls are steadying, with some operators actually starting to increase prices, specialists have driven deflation in recent years as they have improved their competitive credentials.
The good news is that the worst is over
Following a slight decline in spending in 2007 (0.1%), Verdict expects the market to return to positive territory in 2008, achieving average annual market growth of 1.3% between 2006 and 2011.
While illegal downloading shows little sign of significant slowdown, strong growth is forecast for legal downloading. Verdict estimates the legal digital downloading market will have increased by more than 80% in 2006 to be worth GBP112 million and account for 2.6% of total music & video expenditure. However, given the rapid take up of high speed Internet, scaled up marketing activity from leading players and, over the longer term, falling prices, it is anticipated that the digital downloading market will be worth GBP468 million (including video downloads) by 2011. Indeed video downloading has the potential to provide a much needed boost to the market as the technology reaches the mass market over the next few years. Verdict estimates video will account for approximately one-third of the downloading market by 2011.
Verdict also believes grocers’ non-food focus is likely to shift away from music & video. Commenting on this, Alastair Lockhart, Senior Retail Analyst at Verdict Research, said: Music & video has been a highly lucrative market for grocers. High sales densities, homogeneous product and a high proportion of impulse purchasing make the category perfect for the grocers’ non-food model. However, given the relative maturity of grocers’ music & video offers, slowing market growth and renewed competition from specialists, we expect the likes of Tesco and Asda will increasingly shift their attention towards faster growing non-food categories such as electricals.
