Between dad rock and a hard place: The CD buyer is still more relevant than you think

That 2001 decision may have marked the end of Napster — and, on the surface a victory for the Recording Industry Association of America. But the ripples set in motion by the illegal file-sharing network are being felt to this day: Music sales peaked at $14.6 billion in 1999, when Napster was thriving. By 2014 it had shrunk to nearly $7 billion, according to the RIAA’s own numbers. Sorry, RIAA.

“We are seeing a change, intentional or otherwise, in what constitutes the music buyer,” said Mark Mulligan, managing director of MIDiA Research, a media and tech analysis firm in London. “We are moving away from a scenario where large numbers of casual music fans were responsible for large portions of spending to one in which super fans are the core target.” Streaming subscription services are targeted at those high spending music fans. The casual, few-albums-a-year buyer has no interest in suddenly spending $10 a month.

You wouldn’t know it from talking to the RIAA. “Today, the marketplace is stable. It’s more robust than it ever has been. There’s a lot of optimism in the music industry,” Cara Duckworth, an RIAA spokeswoman, told CBS last week. “There are so many more ways for fans to access music today than there was 15, 16 years ago when Napster came on the scene.”

True. The streaming music industry — the legitimate child of illegitimate Napster — is booming. The leaders include YouTube, Spotify and Apple. Expect a battle royale in coming months: Pandora is rumored to be for sale; Soundcloud may go under; new entrants like Deezer and Cür are gunning for headphones globally.

“There will undoubtedly be more consolidation in 2016. But at the same time this is a growing market with space for new entrants,” said Mulligan. The biggest problems with streaming right now? Not enough differentiation. “Everyone is selling the same $9.99/30 million tracks product; they simply have different coats of paint on them.” There’s no money to be made as a standalone on-demand streaming service, said Mulligan. One either needs to have a uniquely cheap deal, like YouTube, or be using music to help sell something else (see: Apple, Amazon).

And yet! Nearly half of recorded music revenue globally is still generated from physical sales — with the CD making up the vast majority of that. (Vinyl has proven stubbornly tenacious, but just a curio.) In the U.S. and U.K. alone, physical spending has declined by 17 percent since 2013, according to MIDiA, which posted this alarming chart last week:

That decline accounts for half a billion of consumer spend, gone. While streaming is replacing some of that, net retail revenue still fell over the period.

“CD buyers are the forgotten part of the music business, and yet the CD remains the single largest recorded music product in revenue terms,” said Mulligan. “The rapid decline in CD sales that accompanied the rise in digital has slowed, and we are now left with a large rump of CD buyers that will decline more steadily rather than rapidly.”

Data from 2015 has not yet been made available. PwC forecasts sales from digital music to reach $9.6 billion last year compared with $9.1 billion for CDs, vinyl records and other formats. The streaming music market has outpaced physical product — but it has not made up for the losses in physical sales. Meaning streaming music may have a bigger slice of the pie, but the overall pie is shrinking.

One possible solution: The RIAA should learnt to think more like Netflix, said Mulligan. Netflix started off as a company that specialized in a physical product — they literally mailed DVDs to their customers. But the company saw the writing on the wall.

“It knew that if its streaming bet was going to pay off, the first thing it needed to do was to digitize the relationships with those customers, getting them to sign up to an email database and for them to get used to having a digital relationship with Netflix before it started trying to sell them a digital product,” he said. “Record labels and retailers need to follow the same model for CD buyers.”