Downloads: Music to Labels' Ears

Sometimes, you catch people singing the blues when they really should be doing the merengue. Preliminary sales figures for the music industry were released last Friday, and they told us a few things we already knew, and some others we could only suspect.

In the first category, digital downloads seem to be growing more popular, according to industry figures. Fourteen million digital albums and 280 million single tracks were downloaded in the first half of 2006, compared with 6.5 million albums and 159 million singles sold in the year-ago period. The combined digital market share, assuming 12 songs on the average album for both digital and physical media, rose from 7.2% last year to 12.1% this time, a roaring 68% leap forward.

In addition, it seems that the telltale white earbuds of Apple's (Nasdaq: AAPL) iPod music player have migrated to Main Street, stealing market share from traditional CDs along the way. It's hard not to equate music downloads with iTunes and the iPod, since Apple's one-two punch controls about 70% of the legal downloading market. SanDisk (Nasdaq: SNDK) and Creative are trying their best to sell players of their own, and companies like RealNetworks (Nasdaq: RNWK) are pushing their digital-download alternatives, but Apple has created a significant moat of installed users. The big get bigger, the rich get richer -- you know how it goes.

The not-so-obvious? Well, some people are complaining about falling CD sales and the impending death of the music industry as a whole. That might be true for businesses such as Trans World Entertainment (Nasdaq: TWMC), which largely depend on nothing but traditional hard plastic discs for their livelihood, but not for the music labels themselves. Add up traditional and digital sales, and this year's first six months saw slightly higher sales than last year.

I'm willing to bet that executives at Vivendi (NYSE: V) Universal Music and Warner Music Group (NYSE: WMG) are secretly celebrating the new business model, with its fatter margins and simpler distribution. As long as the digital market share keeps rising, their total sales could remain flat, yet profits would still rise.

Word on the street has it that $0.07 out of every $0.99 iTunes download makes it into Apple's coffers. The rest is handed over to the labels, which pass on some paltry sum to the artists and writers who haven't yet learned to negotiate decent online rights to their work. The difference is pure profit. No CDs to press, ship, store, or stock. And before you bring up marketing costs, a lot of that is taken out of the artists' pockets. No joke.

The studios stand to lose a few of their old product-pushing distributors, but they're getting brand-new digital ones instead. If you catch the music labels complaining about the way music sales are going, mark it down to a fear of change. The future is digital, it's almost here -- and there's no need to be afraid of it. At worst, it's time to learn a few new steps. A-one, and a-two ...

Listen up, Fool:

• DRM might be the only trouble with digital music.
• I'm not the first Fool to note this dirty little secret.
• There might be some consolidation going on in the industry.

Do market-beating returns sound like music to your ears? To see what multimedia powerhouses have made Tom and David Gardner's list of top stocks, try a free 30-day subscription to Motley Fool Stock Advisor .

Fool contributor Anders Bylund owns none of the stocks discussed above and swims against the stream with a Creative-branded music player. Foolish disclosure is all-digital and freely downloadable.