Music Chains Raise The Volume On Downloads
Penelope Patsuris, 01.27.03, 1:10 PM ET
NEW YORK - The music industry has identified another means by which it can fend off free digital downloads, and this time six major record retailers are leading the charge.
Best Buy (nyse: BBY - news - people ), Tower Records, Virgin Entertainment, Wherehouse Music, Hastings Entertainment (nasdaq: HAST - news - people ) and Trans World Entertainment (nasdaq: TWMC - news - people ) have teamed up in a joint venture called Echo that will sell downloadable music tracks, both online and in stores.
The effort faces considerable challenges but, though it is only just getting started, it looks to be the most promising pay-to-play business on the horizon thus far. There will be critical differences between the download service Echo plans and those currently being offered--without much success--by the record labels.
The primary problem with both MusicNet--owned by AOL Time Warner (nyse: AOL - news - people ), Bertelsmann and EMI Group (nyse: EMI - news - people )--and Pressplay--owned by Sony's (nyse: SNE - news - people ) Sony Music Group and Universal Music, a unit of Vivendi Universal (nyse: V - news - people )--is that they are subscription services. On those Web sites, a consumer pays a monthly fee for access to a certain number of downloads. But people don't like being forced to buy a certain number of tracks per month, says Forrester Research analyst Josh Bernoff. Echo will sell individual tracks.
Perhaps Echo's biggest advantage will be its ability to cross-promote downloads to consumers in retailers' stores. "I might buy a Sheryl Crow album and then get two or three more downloadable bonus tracks for free," says Yankee Group analyst Michael Goodman. He expects to see prepaid cards issued in stores so that teens who don't have credit cards can make purchases online. Echo will further differentiate itself from the free services, as well as the labels' online efforts, by offering plenty of sneak peeks and bonus tracks that can't be found elsewhere. "Retailers are looking at models that will supplement sales, not undercut them," he says.
The labels' online efforts have been dogged by regulatory scrutiny. Goodman says Echo won't face that kind of examination from the Federal Trade Commission, which watches carefully for industry collusion. "A third party will have much more flexibility with its business model," he says.
The gaping hole in Echo's strategy is that it has yet to cut any deals with the record labels that control the content it plans to sell. It will take another six months, but they'll eventually climb aboard, if only out of desperation.
All things being equal, the labels would certainly prefer to control digital distribution via Pressplay and MusicNet--but all things are not even close to being equal. Those services are foundering and CD sales are plummeting, down 9% in 2002.
"The retailers are the labels' best customers," says Goodman. "The labels need [retail] distribution--this is where their revenues come from."
Bernoff cautions that while working with Echo would be in the labels' best interests, "giving a consortium of retailers power over both physical and digital distribution will definitely give them pause." He adds, "The more flexible labels, like EMI, will sign on, but there won't be a flood. It will take time to negotiate the terms."
Another wrench in the works hinges upon the Jan. 24 news that Andersen Merchandisers, which is Wal-Mart Stores' (nyse: WMT - news - people ) music distributor, will purchase the download technology of Liquid Audio, which also holds licenses to sell 350,000 songs. Although it has no deal in place, Andersen plans to sell downloads through the Web sites of its retailers, including Wal-Mart, which happens to be the country's biggest music retailer.
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