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Retailers Form Digital Music Venture

Six retail record store chains ? hurting from competition from CD burning, online music and large discount stores ? are teaming to offer consumers digital music downloads in their stores and over the Internet.

The stores have formed a joint venture called Echo that will provide technology and allow them to offer individual tracks for downloading to portable devices and computers.

The stores are Best Buy, Tower Records, Virgin Entertainment Group, Wherehouse Music, Hastings Entertainment Inc. and Trans World Entertainment Corp., operator of FYE, Strawberries and Coconuts stores.

“We’re trying to make digital music work in a mass market way, for millions of people,” said Dan Hart, chief executive of Echo. “That hasn’t happened yet.”

Last year, the major record labels formed their own, competing subscription-based online music services, but those legal alternatives to unauthorized file-swapping services such as Napster and Kazaa have yet to catch on with consumers. The record company efforts, pressplay and MusicNet, have declined to release subscriber numbers, leading skeptical analysts to surmise the numbers have remained low.

The record labels have blamed the popularity of such illegal services for the decline in music sales in recent years.

The retail music stores also are suffering. Wherehouse Inc. recently filed for bankruptcy protection, citing illegal downloads as well as competition from discount stores such as Wal-Mart. Tower Records hopes to avoid bankruptcy by closing stores and dropping CD prices.

The Echo consortium members hope to leverage their existing relationships with customers and the record labels to package off-line and online music.

Individual retailers will decide how to use the technology and music provided by Echo, Hart said. For example, stores could offer digital music tracks on a handout CD, allowing customers to access some of them for free and charging a fee to listen to the rest. Portable players could come pre-loaded with music that customers could listen to for a fee.

Retailers also could allow customers to download tracks at in-store kiosks or over Internet sites, such as Radio Free Virgin.

Hart said he believes the Echo model can work where the recording industry-sponsored services have not.

“I think consumers will pay, but you have to provide the greater level of value,” he said. “We’re the traditional trading partner of the labels. We understand marketing and how to provide value to consumers.”

On Friday, national magazine distributor Anderson Merchandisers bought the technology and some other assets of defunct Internet music company Liquid Audio. The company said it hopes to offer music through the Internet sites of retailers such as Wal-Mart, although no deals have yet been made.

Echo is working with Microsoft and Real Networks to incorporate digital rights management software that will prevent songs from being copied or sent over the Internet. The venture’s immediate challenge will be to convince record labels to license their catalog.

“Unless you get licensing from the labels, you don’t have a product,” said Josh Bernoff, an analyst at Forrester Research in Cambridge. Mass.

But if Echo succeeds, the model has a chance, Bernoff said.

“Once the labels come on board, we could see really interesting stuff,” he said. “We could see this be the first successful consumer oriented download site.”

Others, however, think retailers may have come too late to the game.

“So many consumers are now thinking about Internet music in terms of an Internet destination site than in terms of a terrestrial brand transplanted to the Internet,” said Phil Leigh, digital music analyst with Raymond James Associates in St. Petersburg, Fla.

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