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Forrester: Physical Media Will Soon Be Obsolete

The increasing popularity of downloading digital audio and video will eventually make CDs, DVDs and other forms of hardware-based digital media obsolete, according to a new report from Forrester Research.

The report, "From Discs to Downloads" states that 20 percent of Americans currently engage in music downloading, and half of those admit to buying fewer CDs as a result. In five years, 33 percent of music sales will come from downloads.

Video file sharing also is on the rise. 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 almost 15 percent of the movie rental business by 2005.

The result is a $700 million loss in music sales that has driven music and film industries to begin using legitimate downloading and streaming services, creating a new era of media distribution.

"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 form of physical media will become obsolete."

The report suggests that the music industry will rebound as the combination of lawsuits and legitimate on-demand music services reverses its losses. At least 10 Windows-based music services are set to debut within the next year, creating alternatives to illegal file sharing.

Forrester's data shows that, while video piracy is on the rise, the film industry's problems lag the music industry by three years. Studio executives have embraced on-line delivery, and Forrester forecasts that on-demand movie distribution will generate $1.4 billion by 2005. Revenue from DVDs and tapes are expected to decline 8 percent.

Bernoff added, "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."