Real-World Music Retailers Fight Back

The music business is being fundamentally and forever altered by the Internet, and the big real-world retailers are painfully aware of that fact as conventional music sales have steadily headed south.

But these companies are not going to slink off licking their wounds, and that accounts for today’s launch of Echo, a retailer-driven digital music consortium that says it is “committed to bridging the gap between brick and mortar and digital music distribution.”

What that means: They plan to license and then sell music digitally themselves, over the Internet and in stores, in direct competition to online music operations like PressPlay and MusicNet.

The music maneuvering has been fast and furious recently as all the players jockey for positions from which to compete on this new landscape.

This latest effort involves Best Buy , Tower Records, Virgin Entertainment Group, Wherehouse Music, Trans World Entertainment operator of the FYE (For Your Entertainment) stores, and Hastings Entertainment

The consortium, created through an investment in Los Angeles-based Echo, said it “will seek competitive licenses to enable retail members to compete effectively in the digital music marketplace…”

“This the type of partnership that emerges when fundamental shifts in a long-prosperous business model happen,” said Steven Vonder Haar, digital media analyst at Interactive Media “Essentially, every link in the music distribution chain has to flex its muscles to demonstrate the value that it brings to the table.”

“With this Echo alliance, retailers are basically saying that they have the capability to bring paying consumers into the digital music sector. If they deliver those consumers, they will get their fair share of the benefits from new digital business models … the primary challenge for Echo will be in crafting a consumer proposition that is more appealing to music buyers than (the online competition) … the question remains whether they can garner content licenses that will enable them to forge an appealing consumer offering while still turning a profit.”

All of those music operations have their own separate e-commerce Web sites, but this move allows them to team up to compete head-on with the pure-play music services.

Another question: Will anybody want to physically visit a music store any more when they can get virtually everything they want over the Internet, either pirated or for a fee, and then burn it to a CD?

Clearly these store operations are betting that the answer, at least for the short term, is yes.

“The Echo consortium was established to create a viable business strategy that combines physical and digital music distribution,” said Dan Hart, CEO of Echo. Tower Records, for example, reportedly plans to go the in-store kiosk route.

But in an increasingly digital world, a viable business strategy is definitely needed. The Recording Industry Association of America (RIAA) has blamed online piracy and CD burning as the major culprits for a 10.3 percent slide in 2001 music sales. In 2002, sales were reportedly down 25 percent

“The CD still has some life, and like vinyl, will fade as the primary product for music distribution,” said Lee Black, senior analyst at Jupiter Research. “But it is a transition that will happen over the next five years, because bands still need CDs to sell and promote themselves to radio and the majority of consumers still don’t use file sharing or download music… as PC penetration grows and more digital products become available for retail, ownership of a CD will be more a novelty then a necessity.”

The decline in real-world music sales obviously has bricks and mortar retailers feeling the pain. Wherehouse filed for Chapter 11 bankruptcy protection last week, and Best Buy has said it will close more than 100 of its Musicland stores.

So the retailers very much want this new consortium to help. “The message of music retail is simple: we have always excelled at selling music to consumers, and we plan to extend our consumer relationships from the physical world into the digital world,” said John Marmaduke, CEO of Hastings Entertainment.

The competition, of course, is just immense, as witness decisions like the one made last fall by Universal Music Group, which said it would make 43,000 music tracks available for consumers to download via a variety of retail outlets and music Web sites.

Echo’s predecessor, Echo Networks Inc., called it quits last year when it decided it couldn’t obtain music licenses on favorable enough terms to support its business model.

The new Echo says that once licenses are obtained, its retailers will be able to deliver digital music products and services either through individually branded or Echo co-branded offerings.

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