Music Merchants Rush in Where Labels Have Failed

Can they do better at getting the public to pay for downloads?

Over the past three years, the recording industry has tried--and failed--to persuade music lovers to pay for online tunes rather than download them for free. Now, it seems, it's the retailers' turn to try. In late January, Anderson Merchandisers, which distributes music to Wal-Mart Stores Inc. (WMT ), announced plans to get into the online music business with its purchase of the flailing Web service Liquid Audio. A few days later, a consortium of six retailers, including Best Buy Co. (BBY ) and Tower Records, announced it was investing in online service Echo Networks Inc. Meanwhile, Web leviathan Inc. (AMZN ) is ginning up its own downloadable music offering.

It's easy to see why the merchants feel they need to jump in. CD sales fell 9% last year, largely because of all the free downloading. At the same time, retailers see the record labels' music subscription services, pressplay and MusicNet, as a competitive threat. But the music sellers also believe their marketing experience will allow them to do a better job selling digital tunes. "We felt the [labels'] solutions weren't focusing on the consumer," says Scott Young, vice-president for digital entertainment at Best Buy.

How would the music merchants prevail where the labels have failed? The key, say analysts, will be providing more choice and flexibility. Right now, pressplay, for example, allows its subscribers to download songs to their PCs temporarily. But unless they pay 99 cents per song, they can't move them to other devices or make permanent copies. And once someone quits the service, the temporary downloads disappear. The retailers figure they can use their collective clout to get the labels to ease up on these restrictions--to lower prices on new songs, deeply discount older tracks, and give consumers more freedom to copy and download music.

But the labels may not be swayed. After all, note analysts, if they were willing to cut prices and make more songs available for copying--and able to make money at the same time--they would have done so. "It takes a lot of energy to make this work," says John Rose, executive vice-president at EMI Group. "Yes, it's about price, but it's about other things, too. You have to have hooks into consumers in other ways."

To go along, the labels are likely to demand that retailers provide plenty of extra marketing bang. That might include throwing in such content as liner notes, artist interviews, and concert tie-ins. The idea would be to lure enough buyers to offset lower prices.

Then there is the vexing question of providing copyright protection. The retailers will have to find a way to install digital armor strong enough to prevent piracy but not turn off consumers. One proposal: making it impossible for people to upload the music to such free file-sharing sites as Kazaa, but allowing them to copy tunes to a computer or MP3 player.

Can the music merchants make this work? Much will depend on their ability to win concessions from the labels. The retailers do have one advantage there. Unlike Liquid Audio and Echo, the merchants are market insiders who have long worked with the labels. "They aren't strangers," says Jim Urie, president of Universal Music & Video Distribution. "They honor and value our content." Whether they can do that while finding the right combination of pricing and extras to compete profitably with free music, though, remains to be seen.

By Heather Green in New York, with Ronald Grover in Los Angeles and Robert D. Hof in San Mateo

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