CD Is the New Vinyl

Hold your head up, fellow musicians.

It's easy to get discouraged over the latest Nielsen SoundScan music retail data. CD unit sales fell a staggering 19.3% during the first half of the year. After watching compact disc sales dip in all but one year on this side of the millennium, 2007 isn't bent on reversing the trend.

These are physical discs that we're talking about, with hard-to-open wrappers and plastic jewel cases that chip way too easily. It's a different world in cyberspace, which saw a 60% surge in digital album sales over the same six months.

Unfortunately for those who fear shrinking pies, only 23.5 million virtual discs were sold. The actual CD platform moved 205.7 million copies. Combine the two formats, and the music industry still suffered a 15% dive in unit sales through the end of June this year.

It's not just quality failing quantity
Cynics would argue that the quality of the content, or lack thereof, is feeding consumers' apathy. With last week's top-selling album belonging to Miley Cyrus -- better known as Disney 's (NYSE: DIS) Hannah Montana to the preteen set -- it's easy to blame the pipeline.

That would be a shortsighted. The charts tell us a more compelling story.

Second on the chart is American Idol winner Kelly Clarkson's My December. Go a few notches lower, and you'll find Paul McCartney's latest CD. It peaked at the third slot a couple of weeks ago, twice as high as his previous studio album. With a Disney soundtrack, an artist launched by a Fox TV show, and McCartney's release on Starbucks ' (Nasdaq: SBUX) Hear Music label, it's easy to see that the hottest titles are coming from unlikely sources.

For traditional labels like Warner Music Group (NYSE: WMG), EMI, and Universal, that may be an even bigger problem than sluggish CD sales. The majors can offset the pain of sluggish CD sales with fatter margins elsewhere. In addition to the beauty of inventory-free sales through Apple 's (Nasdaq: AAPL) iTunes and other digital distributors, the top music companies can cash in by selling ringtones, not to mention the relatively new revenue stream of ad-sharing through video websites like YouTube and MySpace TV. The major labels' challenge to make sure that they have a product that consumers crave.

Web-savvy bands are launching their careers through social networking sites. Websites make it too easy to promote new material, sell merchandise, and reach out to engage their growing fan bases while creating more interactive relationships.

In the worst-case scenario for the labels, the distribution power will shift toward recording artists. And the best-case scenario? Well, basically, the exact same thing happens -- just a bit more slowly.

The new eardrum economy
So what will die first: CDs or major labels? Neither will go down without a fight. Nearly 90% of the albums sold so far this year were physical CDs. That figure will shrink over time, but there are still too many music fans who prefer to own tangible products, even if their first step is to copy the CDs to their computers and transfer them over to their portable media devices.

It doesn't hurt that the digital industry is priced to move singles, not full-length albums. It's a symbiotic relationship between CDs and downloads right now. Pressed onto physical discs, singles could never cover the overhead at $0.99 a pop, no matter how briskly they sold. However, pricing digital albums at the same $10 mark at which many new CDs are now priced gives the actual product the edge.

Add it up, and you'll find that we can't kill the CD for now. The fate of the major labels actually rests in their own hands. They've already gone through waves of consolidation and layoffs, but they may still need to become even more nimble.

The labels don't have to die -- they just need to adopt a new approach to the game. Major labels aren't as relevant as they used to be. Instead of bankrolling CDs and slick videos, they'll need to grab a bigger cut of artists' success beyond mere album sales.

Whether this involves snapping up companies like Live Nation (NYSE: LYV) and IAC/InterActiveCorp 's (Nasdaq: IACI) Ticketmaster, or taking a more material stake in the acts they sign, the music industry will look very different in five years.

Stagnancy is a tune that no one wants to hear.