From Click to Brick
Video didnt kill the radio star, and online music downloads are not expected to extinguish traditional music stores. In fact, some studies have shown that downloading music actually drives CD sales.
Last June, Yankelovich Partners and the Digital Media Association did a survey that revealed nearly half of the nations music fans are turning to the Internet to find artists they cant hear on local radio stations. Most of them 59 percent say hearing a new song or recording artist online has caused them to buy new music at a retail store in their town.
"This study clearly supports what the industry has suspected all along that Webcasters are driving music purchases online through e-commerce and offline at traditional brick-and-mortar stores," says Jonathan Potter, executive director at the Digital Media Association, which represents more than 50 companies involved in the digital distribution of music.
"As this survey clearly shows, Webcasters offer consumers more choices to quench the thirst of a diversity of musical tastes," he says. "And consumers are responding to the diverse offerings by purchasing a wider range of recorded music they would not have known had it not been for the variety of music Webcasters broadcast 24 hours a day."
Yankelovich Partners, a research firm based in Norwalk, Conn., surveyed more than 16,000 Americans age 13 to 39 who listen to more than 10 hours of music per week and have purchased more than $25 of music in the past six months.
"On the Internet, I have been turned on to music that I never would have even considered sampling in the stores," says Rich Reid of Foster City, Calif.
Reid owns about 300 CDs and buys about six per month. He also has more than 400 MP3 files stored on his computer. "One of the greatest benefits that I see Napster supplying is the one thing I dont think any music store could ever accomplish, and that is establishing a music community," Reid says.
"Napster, FTP [File Transfer Protocol] sites, etc. are the key to keeping my ears happy," says Ryan Hanser, a musician who lives in Des Moines, Iowa. "Ive discovered countless new bands online and often I order their CDs from dot-coms," Hanser says. "And buying offline is not an option for me because local music stores dont care what I want to buy. So, in my experience, the online business model that the recording industry seems to cower from find online, download sample, buy online works exceptionally well."
Digital download retailer EMusic.com in Oakwood City, Calif., thinks so, too. It sells MP3 downloads for 99 cents each and has sold more than 1 million music files. "The market for selling downloads is so small right now, none of the retailers is very interested in it," says Steve Grady, senior vice president of marketing at EMusic. "Thats not where they make their money."
Record companies could sell MP3s and save distribution and manufacturing costs, Grady says. Retail sales could also be pushed through Internet kiosks. "In the future, there will be a shift for record stores from revenues derived from CDs to revenues derived from digital downloads," he says.
Traditional retailing could be supplemented with online retailing. Retail offers more than shelf space. Customers buy music by artist not by labels and they want a wide variety to choose from, Grady says.
For now, todays major record labels still depend on retail stores like Camelot Records, Sam Goody, Tower Records and Virgin Records for the vast majority of their nearly $40 billion in annual sales. Online music sales will generate just $2.6 billion by 2003, according to estimates by Jupiter Research. Last year, 13 million CDs were purchased online, according to Soundscan.
Still, the threat of free online downloads of music or MP3 files is great. The Recording Industry Association of America points to a survey by Magex, a digital commerce services company, that estimates that online piracy will cost the music industry $10 billion per year by 2003.
Despite the threat of digital downloads, many traditional retailers have started selling songs via direct download, in addition to peddling CDs through stores, kiosks and Web sites. Its the old "If you cant beat them, join them" strategy. "The Internet has created more excitement about the music industry," says Dawn Bryant, spokeswoman at Musicland Stores, one of the leading retailers of music through its Media Play, On Cue, Sam Goody and Suncoast stores.
In June 1999, Musicland launched a company called Musicland Internet, which operates Web sites under the names MediaPlay.com, OnCue.com, SamGoody.com and Suncoast.com. The Web sites offer online downloading of music files.
"Our sales have been strong most of the year," Bryant says. "Most of our revenue still comes from the stores. We dont think the Web will replace traditional stores. There is a real social aspect to going to the mall and going shopping for music."
Still, more and more people are buying their music on the Internet or getting it for free. Traditional music stores not only face competition from online Web sites such as Amazon.com, Barnesandnoble.com and CDnow Online, but they also face increasing competition from the major record labels. In late October, Bertelsmanns BMG Entertainment signed an agreement with Napster, the controversial music swapping site, announcing plans to create a subscription service.
Not Fade Away
"The record stores arent going to go away," says Trish Naudon, executive marketing director at Digital World Services, a Bertelsmann company that is working with Napster. "We need to figure out how to leverage this new channel to meet consumers needs."
Many industry worries stem from concern about safeguarding intellectual property from piracy. Unlike content delivered through streaming technology, downloaded music is saved on a users hard drive. A savvy MP3 user can make a copyrighted song available for free on the Web. Retailers also worry about artists bypassing them and connecting with the consumer directly. Some recording artists for example, David Bowie and Prince have turned directly to the Internet to release new albums, intentionally bypassing record stores.
To compete in the digital age, some analysts believe traditional brick-and-mortar stores will give way to click-and-mortar stores. "Those that are in the brick market must also be in the click industry," says Charles Hamlin, president and chief executive of InsightExpress, a consumer research company.
At first, traditional retailers appeared reluctant to become players in the online sector, Hamlin says. They didnt want to participate in a market that threatened to erode their core business. But now they see MP3 as a great marketing tool for music sales, he says.
"The history of music development shows that each new medium has supplemented other media," says Rick Joyce at Accenture, a consulting firm. "The Internet actually creates new opportunities for music stores. The Internet focuses everyone, from record companies to artists to record stores, on satisfying consumer desires in the best way possible."
As for the argument that e-tailers might be making brick-and-mortar independent music retailers obsolete, that shouldnt happen, Joyce says. Traditional and online sellers should be able to coexist, he says.
"People will buy must-have products," Joyce says. "The online downloads have not had any level of significant hit on the industry yet. Right now, a CD costs what a CD costs." The possibility exists in the future that while some music becomes more expensive, some music will become cheaper, he says.
"It may well be that the Internet isnt the worst thing that happened to the music industry," Joyce says. "In fact, it could be a good thing."