Retailers Form Online Music Distribution Channel

Six major music retailers have banded together to sell recordings online after realizing that the Internet is working for consumers and not them.

Called Echo, the so-called digital music consortium is supported by Virgin Entertainment Group, Best Buy Co., Trans World Entertainment Corp.'s FYE Stores, Tower Records, Hastings Entertainment and the flailing Wherehouse Music.

“Obviously, there's declining music sales, and that hurts the industry as a whole,” said Echo CEO Dan Hart from Los Angeles. “Echo is not intended to, all by itself, reverse the fortunes of the industry. But what it is intended to do is make digital music work.”

Echo will license the building blocks for selling music online. It also will supply its technology to the retailers for downloads to instruments like MP3 players and via individual retail sites or Echo co-branded offerings.

The company has begun talks with the five major record companies — Warner Music Group, EMI Recorded Music, BMG, Sony Music Group and Universal Music Group — to gain licenses from them for selling music through as well as the participating retailers' sites.

Hart said deals should be in place within six months.

“I think consumers have shown that digital music is an activity they want to do,” he said. “I don't think it's worked for anyone on a mass-market kind of way.”

Online downloads clearly are here to stay. Sales of CDs have plunged in the past few years due to the steady proliferation of song-swapping sites like the now-defunct Napster, KaZaA, Morpheus and Grokster.

A study by Nielsen SoundScan for the year to Dec. 29 said CD sales fell 8.7 percent to 649.5 million units from 712 million in 2001. The drop follows a 2.5 percent plunge in CD sales in 2001 vs. 2000 — the only two years CD sales dropped since Nielsen SoundScan began tracking sales in 1991.

The Recording Industry Association of America estimates that 2.6 billion files of music are illegally downloaded monthly by users of file-sharing programs like KaZaA. These acts of piracy, plus CD-copying and the lack of popular trends, have affected record companies and music retailers.

Echo is a way out of the morass for retailers like Tower and Virgin. The service will be promoted in the retailers' stores with banners, shopping bags, promotional fliers and promotions. Starter-kit CDs that can be activated online will also be used. The respective retail sites will publicize Echo, too.

Advertising will support in-store efforts. The retailers likely will mention Echo and digital downloads in their print ads and on billboards. Online ads may be taken out as well. More importantly, the retailers will tap their databases and offer download options to their customers based on past purchasing behavior.

Hart expects record companies will endorse Echo as a new channel of digital music distribution.

“We're going to the labels and saying, 'Hey, our goal is to maximize overall revenue for music, not to undercut and undermine CD sales,'” he said.

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