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The music industry may be threatening itself as it moves to aggressively pursue music file traders, argues Phil Leigh, analyst and vice president of Raymond James and Associates.

The Recording Industry Association of America has begun litigation against individual file traders. But it's doing so at the same time as exploring new relationships with digital music distribution services, such as ITunes Music Store and OD2.

The effect has been a 22 percent drop in peer-to-peer file-trading activity between mid-June and late August, Leigh says. However, the move may also have broken the relationship between music consumers and the labels.

"Unfortunately, it also appears that the declining trend in CD sales accelerated during the period of reduced file trading," he says.

Musical Downturn?

"From June 15 to August 3, CD sales dropped by 9.4 percent. However, on June 15, CD sales were down only 6.1 percent year-to-date. The increase in the rate of decline [from 6.1 to 9.4 percent] translates to acceleration in the rate of decline," Leigh claims.

The analyst acknowledges that a seven-week measurement cannot be seen as conclusive. Other factors, such as holidays and the quantity and quality of releases, can affect such figures.

But the analyst isn't optimistic about the effects of the RIAA's approach.

"The initial data is not encouraging for the labels, as it suggests that the fundamental premise underlying their deterrence strategy is flawed," he says. "Specifically, curtailing file trading may not improve CD sales, but instead may accelerate their decline."

New View Needed

Looking at the figures, Leigh believes the prepackaged CD format has "seen its best days."

"The transformation of recorded music sales from physical distribution to Internet distribution is inevitable," he says.

He advises that the labels should "continue their steps in the direction of [arranging] friendly consumer-use licensing terms for their content [with] the legitimate Internet music distributors."

Looking forward, Leigh predicts that once the labels enjoy profits from the new medium, then movie studios will be "right behind them." He predicts a second wave of legal distribution services.

"This implies years, if not decades, of rapid growth ahead for the successful pioneers," he adds.