The end of physical media is nearing. In an effort to fight file-sharing piracy, music and movie companies will embrace legitimate downloading and streaming services, creating a new era of media distribution. According to “From Discs To Downloads,” a new report from Forrester Research, Inc. (Nasdaq: FORR), 20 percent of Americans engage in music downloading; half of those admit to buying fewer CDs. In five years, 33 percent of music sales will come from downloads. By extension, video file sharing has become more prevalent. One in five young file sharers has downloaded a feature film. Cable video on-demand and other on-demand movie distribution channels will account for close to 15 percent of the movie rental business by 2005. The implications of the shift from hard media will mean change throughout the entertainment industry — the report defines clear winner and losers.

“The shift from physical media will halt the music industry’s slide and create new revenues for movie companies, but it will wreak havoc with retailers like Tower Records and Blockbuster. As a result, we’re about to see a massive power shift in the entertainment industry,” said Josh Bernoff, principal analyst at Forrester. “Entertainment executives focused on the short term — fighting piracy — are losing track of the long-term consequences. On-demand services are the future of entertainment delivery. CDs, DVDs, and any other forms of physical media will become obsolete.”

The music industry will rebound as the combination of lawsuits and legitimate on-demand music services reverses its losses. In the next nine months, at least 10 Windows-based music services, such as Apple iTunes Music Store and MusicMatch, will emerge, creating convenient alternatives to illegal file sharing. Music sales will increase by more than half a billion dollars in 2004 thanks to online revenues. As consumers become more comfortable with online alternatives, subscription services will take off.

Movie industry executives have an opportunity to learn from their music counterparts. Although Forrester’s data shows that movie piracy is on the rise, the film industry’s problems lag the music industry by three years. Studio executives are embracing many forms of on-demand delivery, including cable video on-demand and Internet distribution. Forrester forecasts that on-demand movie distribution will generate $1.4 billion by 2005, while revenue from DVDs and tapes will decline 10 percent between 2006 and 2008.

“Music and studio executives are finally beginning to understand that they must create new media services through channels that consumers will pay for. Consumers have spoken — they are tired of paying the high cost of CDs and DVDs and prefer more flexible forms of on-demand media delivery,” added Bernoff. “Additionally, technology trends like increased broadband adoption and cheap, widespread storage have made it possible for consumers to easily manage their digital entertainment at home.”

“From Discs To Downloads” draws on survey results of 4,782 adults and 1,170 young people between the ages of 12 and 22, the most active users of file-sharing software. The report looks at how several groups are affected by the shift from hard media, including Internet portals, cable companies, device makers, media conglomerates, retailers, artists, and consumers. The research includes forecasts for US music and video revenues through 2008, as well a competitive landscape of on-demand music and movie services.

The research mentioned in this press release is available to Forrester WholeView™ clients and can be found through