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Josh Bernoff: Customers turning to downloads over CDs

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• File sharing has lopped an estimated $700 million off of music sales.

• Half of all file sharers say they now buy fewer CDs.

• By 2008, various forms of video on-demand will gross close to $4.2 billion.

Source: Forrester Research

(CNN) -- Forrester Research released a study this week predicting an increasing drop in compact disc sales as Internet music file-sharing keeps gaining ground on the flagging CD.

Following the report, Universal announced it will lower the wholesale price of its CDs with hopes retailers will charge below $10 for top line albums. The goal is to revive CD sales after a three-year decline.

CNN technical correspondent Daniel Sieberg discussed the future of CDs with Forrester Research Analyst Josh Bernoff:

SIEBERG: It seems to me that every type of format eventually goes by the wayside, whether we're talking about vinyl or eight-track or laser disk. What makes this shift or this trend that you're predicting so unique or different?

BERNOFF: Well, we're not looking at CDs getting replaced with some other format; we're looking at all physical formats going away completely. We're in the world where the most active music consumers can download the songs that they want right now illegally, but increasingly from legal services like Apple iTunes, and in a world like that, the idea that you have to keep your music on some sort of piece of plastic just doesn't apply.

SIEBERG: So, there would be nothing tangible for somebody. They would literally just have these files on their computer or wherever they might want to store them. We're also talking about on-demand TV.

I want to mention the findings in the research that said 33 percent of music sales will be from downloads by 2008 and revenues from CDs will be off 19 percent and DVDs about 8 percent. I know you looked at a number of different reasons for this, but what were the main factors that you saw in the study you did?

BERNOFF: The main factors for CDs is really the piracy that's happening, now. The only way that the music industry can fight that is to create legitimate download services. But, the net effect of the piracy and those services is to just make CDs irrelevant. In the case of movies, the main force is video on-demand from your cable operator, which offers the same features as rentals in home video, but with a lot more convenience. And when you've got that, there's no reason to hang on to your DVDs.

SIEBERG: I know a lot of my friends who love their DVD collection, they like some of the special features, they like a lot of the offerings that they get with their DVD and having something to even give as a gift to somebody. How did you rectify that in this study with people who may really enjoy where DVDs are going?

BERNOFF: First of all, if you compare that to CDs, we've heard that -- you know, people are in love with the cover art, but Kazaa proved that there's no love for the physical object, it's the tracks. In the case of DVDs, the special features you're talking about are going to be available in video on-demand, so you'll have the same experience, there. And I think that you'll see a slow, steady decline, here. We're not talking about -- you know, five years from now, there are no more DVDs. But increasingly, a lot of the business that's currently in physical objects, like DVDs, is going to be coming down the wire, and that's what's important here is the proportion of movie viewing that shifts to on-demand viewing.

SIEBERG: How is this going to shake out? How's this going to affect say, the entertainment industry or average consumer?

BERNOFF: If you look at the music companies and movie companies, they have to make a shift here, but they can survive. It's great for consumers who get a whole lot more flexibility. The disaster that befalls somebody here, are the retailers because retailers are in the business of selling stuff, selling objects, and they're not going to be able to sell nearly as many CDs in the future, not as many DVDs. Blockbuster, Tower Records, people like that, are really in the position to lose the most, here.

SIEBERG: How much of this trend is being pushed by a youth movement or by young people?

BERNOFF: This is definitely a trend that's coming from youth. The young people do this the most, and when you go into Tower Records a few years from now, it's going to be all old people hanging out in there.

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