Music Decline to Accelerate in 2008 With Retailer Cutbacks

The music business has seen sales drop for seven straight years. Next year will be worse. That’s the growing consensus we hear from people in the industry, who are assuming that physical sales will plummet even faster in 2008 then they have to date.

That’s because the three big retailers who comprise most of the industry’s sales — Best Buy (BBY), Wal-Mart (WMT) and Target (TGT) — will likely make significant cuts in the amount of floorspace they devote to CDs. We are hearing predictions of cuts that range from 20% to 40%, with Wal-Mart making the most aggressive pullbacks.

Retailers have already been cutting back on CDs for a while. In a July note, Pali Research’s Rich Greenfield estimated that Circuit City, Target and Wal-Mart had cut between 5% and 23% of their CD inventory in the last two years (though Best Buy had actually increased its CD slots by 31%). But now industry executives expect the big players to cut back more dramatically after the 2007 holiday season, because they’ve concluded that the CD market is in permanent decline.

So how small will the music business get in 2008?  Here’s some rough maths:

Assume that the retailer cutbacks come in the lower side, say, 25%. Assume that those sales drops are somewhat mitigated by digital sales and by die-hard CD buyers who seek out discs at other outlets, like Amazon–and call it a 20% sales drop. The U.S. is a third of global music market, and the retail cutback won’t affect the rest of the world, so the decline there shouldn’t be as steep — say, 10%. That’s still a 14% drop industrywide (that number would vary depending on how much exposure a big label has to the U.S.)

But a retail cutback could be much more damaging than any single year revenue decline. In a worst-case scenario, and one we think is quite likely, a cutback sets off a self-fulfilling prophecy: Retailers stock less music, so consumers have less to choose from, and then buy even less, causing retailers to stock even less. Repeat.

The only good news for the big labels: They see it coming, and are scrambling as fast as they can to adapt. The bad news: There’s little they can do.

Related: Retailers Pulling Back On DVDs