By Philip Elmer-DeWitt
April 3, 2008

UPDATE: Apple on Thursday issued a press release declaring itself No.1. See here.

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It happened one week in January, according to a memo sent to Apple employees on Wednesday and intercepted by Ars Technica (link). The memo contained weekly data from a NPD Group Music Survey dated Jan. 8, 2008, and showed Apple’s (AAPL) iTunes store passing Wal-Mart (WMT) for the first time to become the No. 1 music retailer in the United States.

By Feb. 26, however, something must have changed, because that’s when Apple announced that it had passed Best Buy (BBY) to become, for the first time, America’s No. 2 music retailer.

What’s going on?

The most likely explanation is that the January results represent a blip in the data, a short-term peak caused by recipients of iTunes gift cards cashing in their Christmas presents. Music gift cards sold through Wal-Mart and Best Buy in December may also explain why Amazon (AMZN) dropped to No. 4 in the Jan. 8 survey.

But the long-term trends are clear, as sales of physical music continue to give way to digital downloads. The Ars Technica report cites other NPD data showing that 48 percent of U.S. teens — the primary engine of new music sales — didn’t buy a single CD in 2007, compared with 38 percent in 2006.

Despite growing competition from Amazon’s new digital music service, Apple’s position in the legal download market is still strong, given the iPod’s 70 percent share of MP3 player market and its tight integration with iTunes. Apple became the No. 3 music retailer in June 2007 when it passed Amazon, the No. 2 in February when it passed Best Buy, and it may yet overtake Wal-Mart for more than just that one week after Christmas.

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