Legal music downloads were fastest growing Digital Music Category in 2006.

According to The NPD Group 2006 offered the music industry positive and negative news. The recording industry registered solid growth of digital music sales from services like iTunes, but they continue to fight against serious challenges from music piracy in the form of peer-to-peer (P2P) file sharing.

“Legal a la carte downloads were the fastest growing digital music category in 2006, and it is likely that the annual number of legal users will surpass P2P users in 2007,” said Russ Crupnick, vice president and entertainment industry analyst for The NPD Group. “Unfortunately for music labels, the volume of music files purchased legally is swamped by the sheer volume of files being traded illegally, whether on P2P or burned CDs sourced from borrowed files.”

P2P: User rates decline as downloaded file numbers increase

By the end of 2006, there were 47 million “digital music households” in the U.S. — i.e., households with a member who downloaded, ripped, burned, played, or uploaded digital music. Among those households, 15 million actively downloaded at least one music file from a P2P site in 2006 – an 8 percent increase over 2005, but still a slower growth rate than was noted in prior years. While P2P user growth rates slowed, the average P2P user downloaded many more files in 2006 (5 billion files) than the previous year, which represents a 47 percent increase in P2P downloading compared to 2005 (3.4 billion files).

“The slowdown in the growth rate in the number P2P users is somewhat remarkable given the growth in digital music users overall, the emergence of digital video, and the expanded consumer exposure to broadband,” Crupnick noted. “Even so, five billion files downloaded illegally clearly affect prospects for both CD sales and sales of digital song tracks online. While the industry’s anti-piracy initiatives appear to be having some positive effect on this trend, further efforts remain necessary to stem the loss of music sales to P2P.”

Among P2P file sharing sites, Limewire moved to a commanding 62 percent share of downloads. The average Limewire user downloaded 309 music files in 2006, an increase of 49 percent from the previous year. Torrent services, like BitTorrent, have also gained in popularity and reflect an increasing number of files downloaded per user, though some sites have recently begun offering material for sale, as well.

Paid downloads on the rise

While in 2005 NPD noted a two to one difference between the P2P and pay-to-download populations, in 2006 there were nearly 13 million households using a paid digital music download services – nearly three times more than NPD reported in 2004. Overall the number of music files that were purchased in 2006 exceeded 500 million, which is a 56 percent increase from the previous year. “Paid usage is gaining on P2P; however P2P users tend to download many more files per user, than do those consumers who pay for music downloads,” Crupnick noted.

Among PC users, iTunes maintains a 70 percent share of households using a legal service and the share of song tracks downloaded; however, the average number of files purchased by the average iTunes user fell 11 percent since 2005. Songs purchased per buyer from Napster and Wal-Mart also declined, while Yahoo’s digital music download sales rates held steady.

“Even though there is significant growth in legal music downloading, much remains to be done by the music industry to protect the bottom line,” said Crupnick. “More anti-piracy initiatives need to be crafted, if there’s any hope of reducing the amount of P2P file sharing and other piracy. Most of all, music studios should continue to nurture and support those who pay to download music, in order to reinforce repeat usage and continue to build on take rates.”

For more information at http://www.npd.com