Alain Levy, the former head of EMI's recorded music business,caused a stir last year when he told an audience at the LondonBusiness School: "The CD as it is right now is dead."
Digital enthusiasts predicting the CD's demise were heartenedover Christmas when a host of retailers, most notably the musicspecialist HMV, said declining CD sales had hit profits over thecrucial sales period. With the likes of Woolworths singling outspecific titles that had caused it to miss sales forecasts, thefuture of the format did appear to be in doubt.
The explosion in the popularity of digital music over the pasttwo years has been deemed the culprit for the CD's woes. Thestunning success of Apple's iPod and the increasing number of mobilephones designed to play digital music have already accounted for theclunky discman.
With the music press full of stories about bands like GnarlsBarkley and Koopa riding up the charts on songs only available viadigital download, the CD looks set to be heading the same way as itspredecessor, the cassette tape. Digital music sales nearly doubledto $2bn ([pound]1.01bn) in 2006, according to the InternationalFederation of the Phonographic Industry, despite the overall marketfor music declining around 3 per cent for the second consecutiveyear.
Yet it is important to pause for breath amid the euphoria overthe success of digital music and consider that CDs still constitute90 per cent of the industry's sales. Despite the surge in onlineactivity, UK album sales topped the 150 million sales mark for thefourth consecutive year in 2006, declining only 2.5 per centaccording to the British Phonographic Industry.
A spokesman for the BPI, the UK music industry trade body, said:"The CD is the most durable format on the market. It has been withus for 25 years now and is certainly surviving in an era whenconsumers are getting more digital."
Despite the hype around digital music, the CD remains thedominant format. The IFPI's chairman, John Kennedy, said that in1996 some analysts had predicted there would be no CD factories inoperation in 2006, a forecast that has proved to be rash.Ironically, the growth in e-commerce has benefited the old-fashioned CD, with music lovers using a host of sites to source CDsat a cheaper price than in the shops.
Simon Fox, the chief executive of HMV, said Take That's greatesthits album has proved to be the second-fastest selling CD of alltime in the UK. "The CD is not dead and we will find a number ofways we can compete in the digital space," Mr Fox said.
Independent labels have been one of the big beneficiaries of theonline surge. Alison Wenham, the chairman and chief executive of theindependent music trade body AIM, said that digital distributionhelped solve the problem of getting independent music into high-street shops.
However, Ms Wenham sees a strong future for the CD due to theintegrity of the album format. "There are different types of musicbuyer from the casual fan to the anorak. For those of us in themiddle, there is still a desire to buy an album to capture anartist's body of work in a CD collection. That is not the case withdisembodied tracks downloaded over the internet," Ms Wenham said.
Mark Mulligan at Jupiter Research noted that the singles markethas been decimated by the digital trend, but album sales benefitfrom single-track downloads as consumers get a taste of an artist'swork and then invest in an album if they like it.
The CD market is also likely to be held up for now by olderbuyers. Ms Wen-ham said music fans over a certain age are morelikely to invest in an expensive sound system and cherish theartefact of a CD. "For older buyers, there is nothing better thansitting down in front of the fire with a CD booklet of something youjust bought," she said.
Yet analysts remain cautious over the format's long-term future.Jupiter's Mr Mulligan said: "It is absolutely not dead, but it isnot a healthy prognosis." He predicts a 5 per cent decline in the CDmarket every year for the next five years.
Mr Mulligan said that, for children weaned on file sharing andfree music downloads, the sense of ownership is greatly diminished."Looking a generation ahead, there are serious questions over thephysical format," he said.
Yet for now the CD remains popular even among savvy youngsters.In the UK, 75 per cent of internet users said their preferred formatwas the CD - even among 16-to-24 year-olds this figure was 58 percent, according to research from Nielson/NetRatings. The researchfound people liked CDs because they could use it in many differentmusic systems, they could keep a physical collection, they would beless likely to lose it and they liked lyric sheets and cover art.
The challenge is for music companies to invigorate interest inthe physical format by sprucing up the dowdy CD while also facing upto the structural shift within the industry as more music movesonline. One way to stimulate physical music sales is to packageexisting music in more exciting ways. More and more music labels areunearthing unreleased tracks or concert footage of artists torepackage classic albums while there has been a significant rise inthe number of expensive box sets of popular artists. Universal Musichas invested in a series of "Earbooks" - a coffee table-sized bookabout an artist with a number of CDs embedded into the tome.
However, not all music fans are interested in shelling out forexpensive box sets and music companies need to find a way to matchthe lower pricing model of digital downloading.
Universal has adopted a "three-tier" pricing system for majorreleases whereby consumers can choose between deluxe, regular andcheap versions of the same album. A deluxe CD can sell for up to[pound]17.99 with the consumer choosing to pay more for bonustracks, more artwork or a bonus DVD with interviews or video contentof the band. For more casual buyers, a more basic version of the CDthat comes in a slipcase can retail for as little as [pound]5.99.
Within the digital world, the major music labels have stepped upefforts to innovate. Alex Zubillaga, the head of Warner Music'sdigital division, said: "When you have had it too good for too long,you get spoiled." Mr Zubillaga said, in the digital space, customersare offered priority when buying concert tickets to tempt them tobuy albums online. He added that user-generated merchandise offers agrowth opportunity, saying users could pay to print their name on anofficial T-shirt.
Yet in the physical space more innovation is necessary. MrMulligan said music needs to transform the CD from a "lean back"format to something far more interactive.
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