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Sound Moves

Brick-and-mortar music stores go digital

By Kevin Kenyon

Shoppers will soon be able to use computerized kiosks to make their own CDs at FYE music stores.

In what could be viewed as a preemptive strike against online music retailers, a growing number of brick-and-mortar record stores in the United States are trying to go digital in time for the upcoming holiday season.

Through a process known as digital downloading, customers in record stores will soon be able to make their own CDs in anywhere from 10 to 20 minutes. Once an album is selected, interactive preview stations in the stores will burn it into a CD format, complete with original cover art and liner notes.

In the last six months alone, several major shopping center record store tenants have signed agreements to incorporate this type of technology. They include: Trans World Entertainment Corp., which operates stores such as Camelot; Wherehouse Entertainment; and Virgin Entertainment.

“The main advantage for the record stores is the ability to expand their library,” said Tom Tashjian, an analyst who follows music stores for Bank of America Securities, San Francisco. “A record store in a mall environment typically has about 15,000 items on inventory, and this gives them access to about 65,000, with an unlimited potential to add more.”

By adding digital downloading capabilities, Tashjian noted, in-line music stores can effectively keep the playing field tilted in their direction and ahead of online music retailers, which are looking to capture a larger portion of traditional sales.

In 1998, music sales totaled $13.7 billion domestically, according to the Washington-based Recording Industry Association of America (RIAA).

The majority (86%) of those sales were conducted at retail outlets, while only 1.1% were made online; the remainder is attributed to tape and record clubs, according to the RIAA’s 1998 Sound Recording Consumer Profile, which was released in March.

There is some concern, however, that those numbers could change.

The online music industry, with the help of an audio compression format called MP3, has given consumers the ability to download and purchase music directly from the Web.

Up until now, observers say, the technology has been slow to catch on, but the prospect of widescale acceptance has not escaped the music industry’s attention.

In July, the association released a new set of standards that consumer electronic companies must adopt if they want to make devices that play commercially recorded music.

The move was part of the group’s Secure Digital Music Initiative, which was launched last December to protect artists from piracy.

Some observers project that the online music industry will present challenges to traditional retailers on a number of levels over the next several years. Although the more immediate threat to brick-and-mortar retailers remains the online sales of CDs, tapes, and records, which New York- based Jupiter Communications says will capture 14% of the total U.S. retail music market by 2003, the digital distribution of music may prove to be a greater long-term challenge.

Revenue from digital distribution will reach just $147 million by 2003 (comprising 5.7% of online music sales), according to Jupiter.

However, although the digital distribution may be hampered by the lack of online music listeners in the near-term, Jupiter says the number of users who buy music online will increase as people become more acclimated to buying goods and services online. Jupiter forecasts that by 2003, 33 million users will purchase music online.

Instead of waiting for something to happen, brick-and-mortar retailers are taking a proactive approach, with technology at the forefront.

The CD station, which was developed by RedDotNet, a subsidiary of Digital On-Demand, a Carlsbad, Calif.-based technology firm, appears to be a step in that direction.

The system debuted in July in Columbus, Ohio’s Virgin Megastore, which is part of Easton Town Center, a 750,000-square-foot festival/entertainment center which opened earlier this year.

In August, RedDotNet signed an agreement with Los Angeles-based Wherehouse Entertainment, which operates 554 stores (both freestanding and retail locations) in 33 states, to install the systems nationwide. That deal came on the heels of similar agreements in June with Trans World Entertainment, Albany, N.Y., and Virgin Entertainment Group, New York, which operates the Virgin Megastore chain.

The content for RedDotNet’s systems will come from two main sources: Sony Music Entertainment, New York, which agreed in June to digitally distribute over 4,000 of its titles; and EMI Recorded Music, the U.K.-based firm which has a roster of approximately 1,500 artists.

Discussions are also under way with other major music companies, as well as with independent labels, according to Beth Walton, RedDotNet’s director of marketing.

In discussions with retailers, Walton said there was little concern the systems would cannibalize traditional sales.

“Most of the retailers see it as a huge boon because it’s vastly increasing their inventory,” she said.

Most importantly, the technology gives brick-and-mortar stores the ability to compete with the online music industry, she said. “Record stores, especially in a mall environment, don’t typically carry a lot of inventory, but this greatly expands the number of titles they can offer.”

From the record store’s standpoint, the main benefit is the ability to give customers as many options as possible, according to John Sullivan, Trans World’s CFO.

“If we don’t happen to have a title in stock, we’re still able to satisfy their needs, which is a significant breakthrough,” he said.

To illustrate his point, Sullivan noted that if an artist has 40 titles, a record store would typically have 15 of them in stock, which would be rotated periodically.

“In many cases when people don’t find something we lose that sale,” he said. “We believe having the ability to actually make the CD along with the cover art and liner notes will help us recapture some of those lost sales.”

Trans World’s strategy is to test the systems in stores in Los Angeles and New York for the holiday season, with a full rollout slated for next year, Sullivan said.

Officials at Wherehouse Music, which is planning a similar roll-out strategy for its stores in Los Angeles, also are optimistic that the systems will help brick-and-mortar retailers stay on top.

“We believe this will help us remain one step ahead of the online competition,” said Hugh Hilton, president and CEO of the company.

It will also help a chain like Wherehouse, which has a much smaller store footprint (2,500-5,000 square feet) than larger record stores like Tower (15,000-25,000 square feet), essentially become a virtual megastore, he said.

“It’s kind of like going to a 7-11 store; it’s very convenient but they don’t have everything you want so you have to go to the grocery store,” he explained. “Now if you could go to the 7-11 and it had everything you wanted, that would be pretty compelling.”

Smaller record stores like Wherehouse, Hilton added, simply don’t have the space or enough consumer demand to carry as many titles as they would like.

That often contributes to what players in the music industry refer to as the “walk-out rate,” where people come, don’t find what they’re looking for, and walk out of the store without making a purchase, Hilton said.

With the new technology, Hilton said, record stores will also have a significant advantage over the digital music industry in terms of sound quality.

“That’s something that a lot of people don’t understand, that when the music is transmitted it loses a lot,” he said, noting that audio quality suffers when compressed MP3 files are decompressed onto consumers’ hard drives.

“With the new systems we can offer customers a virtually identical product offered by the labels, complete with cover art and liner notes, and that could never be duplicated in the home environment,” he said.

While only time will dictate the true impact of both digital music and online sales of CDs, records, and tapes on the music industry, this latest endeavor demonstrates that U.S. record stores plan on doing everything possible to remain the primary channels for consumers to buy music.

Trans World’s Sullivan said that if all goes as planned, digital downloading could greatly aid brick-and-mortar retailers in their effort to that end.

“The online business will certainly grow, there’s no denying that it will increase percentage-wise, but I truly believe the lion’s share of the business will still be conducted in the stores.”