Originally created 08/08/99

Downloadable-music sales expected to surge



Online shoppers are dreaming about the day when they'll be able to easily purchase any song by downloading and then copying it onto a compact disc. No postage. No waiting. No going to the record store. It's instant listening gratification.

Experts say it will take several years for downloadable music to become mainstream. But they add that it promises to be the most revolutionary change in the industry since the compact disc replaced vinyl records. If that's true, the latest innovation also poses a huge threat to the multibillion-dollar music retail industry-a threat that, so far, traditional retailers seem to be shrugging off.

Musicland Stores Corp., the largest music retailer in the nation, entered the online business just this summer. An executive at Tower Records, owned by MTS Inc., played down the emerging market, referring to it as a "video game."

But if retailers are in denial, those who track electronic commerce for a living aren't. "The brick-and-mortar model for record retailing is without question under siege," said Mark Hardie, a senior analyst with Forrester Research Inc., a Cambridge, Mass., market research firm that has been closely tracking e-commerce.

The reason is simple: With the technology to ship music through copper wires, online merchants will no longer be handicapped by expensive shipping charges and long delays. That instant access may make digital downloads a $1.1 billion business in 2003, up from an estimated $1 million this year, according to Forrester Research.

For now, downloadable music hardly appears foreboding. It's offered free at sites such as Tunes.com, MP3.com and Emusic.com. But equipment costs are steep. Digital music players now retail for $150 or more. And the software and hardware needed to download music costs several hundred dollars more.

Downloadable music also is a clunky world of slow connections and an abundance of unsigned artists whose works weren't meant to be heard outside of their own bathroom showers.

"The good news is you have the ability to expand your horizons," said Jo Sager, marketing vice president for Tunes.com, an Internet company that offers free music downloads. "The bad news is you have to listen to a lot of junk, because there's a lot of bad music out there."

That's expected to change after the recording industry decides on a screening technology for the next generation of portable digital music players. The technology is intended to prevent people from playing illegally copied music on the devices, and in effect create a new arena for music retailing.

And if there's any doubt about how online shopping can dash old-fashioned business models, remember that it was just last year that ground-anchored Borders Books & Music and Barnes & Noble found themselves scrambling to beat back online rival Amazon.com.

This lesson could be especially painful for music retailers, and more so for independents with less capital to spend on e-commerce sites, analysts say.

Now that brick-and-mortar retailers have gotten a glimpse of the future, the threats are coming from all sides. Internet-only retailers such as CDNow Inc. and Amazon.com Inc. are offering discounted music and have much better name recognition among online shoppers. Upstarts such as MP3.com, the pioneer of downloadable music, are gaining valuable experience by offering free downloads.

Traditional retailers also will have to fight their own suppliers-record labels such as Sony Corp.'s Sony Music Entertainment-on the Web. Sony will use Microsoft Corp. technology to sell "virtual singles" over the Internet about the same time the songs show up in stores. And label owners Universal Music and BMG Entertainment have partnered up to create GetMusic.com, which will sell downloadable CDs directly to online shoppers.

Not content with selling books, Amazon.com has begun distributing tunes for free over the Internet and aspires to become a leader in downloadable-music sales. In the meantime, Sony and Time Warner Inc. purchased CDNow.com and combined it with their joint venture, the Columbia House music club.

Traditional retailers are lagging behind their online counterparts. Musicland Stores, for instance, began selling its products online more than a year after its Internet-only competitors staked their claims and gained valuable experience in cyberspace.

"Retailers take a wait-and-see attitude," said John S. Glass, an analyst with Deutsche Banc Alex. Brown Inc. in New York. "When it ends up impacting them, then they move. There are phases of denial they go through. . . . (But) in the Internet, being first does matter. That's a shift in paradigm for many retailers."

Brick-and-mortar retailers say they are adapting their stores for the new technology. Virgin Entertainment Group is experimenting with in-store kiosks, for digital distribution.

Trans World Entertainment Corp., which owns Coconuts, will soon add similar kiosks. Musicland will begin testing downloads at its stores and online site this fall. Tower Records plans to do the same but isn't sure when.

Despite their efforts, brick-and-mortar retailers seem reluctant to sink huge amounts of capital into online sales, in part because few companies have shown they can make money at it.

"We're not going to spend $80 million or $100 million, which other people are willing to do," said Keith Benson, co-vice chairman and chief financial officer of Musicland. "We think it's a mistake."

Stan Goman, chief operating officer at Tower, echoed those sentiments: "I think there are a lot more interesting things than this, to be honest with you. It's a video game. It will be popular for a while."

Another stumbling block for old-line retailers is concern that they will cannibalize their own stores, something store managers who get incentives for increasing sales deeply fear. Internet-only retailers, on the other hand, don't have to worry about this because they have no stores on the ground.

"It's a channel conflict," analyst Hardie said. "But they'll figure it out."

Mom-and-pop stores may have much more to worry about. Over the years, they have learned that their success hinges on specializing, so they have carved niches in such areas as alternative, jazz and Hispanic music.

But now, shoppers like George Hickey say they are taking fewer trips to their favorite, offbeat record stores. "One of the things about CDNow is that it's like some of these music-aficionado record stores," said Hickey, a 26-year-old economic consultant from Chicago. "They have everything."