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The End For Music Retailers?

In late April, Madonna gave a rare in-store concert before 400 fans to plug her new American Life album. Outside the event, which took place at Tower Records in New York’s Greenwich Village, another 2,000-plus fans thronged. For years, Tower has harnessed such star power to burnish its credentials as a purveyor of hipness. “It was the buzz around town,” boasts store manager David Montes of the Madonna love-in. But the splashy appearance obscured a harsh backstage truth: Tower Records is in such deep trouble that its parent, privately held MTS Inc. in West Sacramento, has put the company on the block.

Tower is not the only music retailer singing the blues these days. Declining CD sales, the hit from online downloads, and growing competition from the likes of Amazon.com (AMZN ), as well as discounters such as Wal-Mart and Target (TGT ) are pushing specialty music retailers to the wall. In the past 15 months alone, Best Buy has put its Musicland unit up for sale, Wherehouse Entertainment has filed for bankruptcy, and Britain’s HMV has closed two of its nine U.S. stores. The continuing drumbeat of bad news has some predicting that the traditional music store will soon go the way of the eight-track player. “The [specialty music] industry is dying,” says Jerry R. Goolsby, a professor of music industry studies at Loyola University New Orleans. “No one knows what to do about it.”

It’s not as though the music retailers didn’t see this coming. In the mid-1990s, two seismic shifts shook the industry: Big discounters started pushing CDs far more aggressively, and a slew of music stores popped up on the Web. Taking aim at the latter threat, Tower, Music-land’s Sam Goody unit, and others launched e-tail operations of their own. But they were no match for the likes of Amazon.com Inc., which often undercuts them on price, or for eBay (EBAY ) Inc.’s half.com site, where buyers can find new and used CDs, sometimes for a fraction of the retail price. As a result, none of the record stores has been able to use the Web to boost total revenues or compensate for falling store sales.

Nor have they done any better against the general merchandisers. Discounters such as Wal-Mart Stores (WMT ) Inc. and category killers such as Circuit City Stores (CC ) Inc. stock cut-price CDs to entice shoppers into their stores. The strategy clearly works: Today, says Goolsby, 42% of the recorded music sold in America comes from the discounters and category killers, up from some 25% in 1992.

Another problem is consumers’ growing appetite for grabbing music online. Downloading, legal or otherwise, has already hit CD sales hard: Since 1999, annual retail music sales have slid 15%, to $8.9 billion in 2002. And the tempo is likely to pick up as more companies, including Apple Computer (AAPL ) Inc. and RealNetworks (RNWK ) Inc., get better at selling music online.

That doesn’t leave much room on the dance floor for the stand-alone music retailers – one reason that most analysts are hard-pressed to think of anyone who would want to buy Tower or Musicland. Tower has posted a net loss since 1999, including $57.1 million of red ink in 2002. Making things worse, it’s struggling with a heavy debt load of $312 million, borrowed to fuel its expansion in the late ’90s.

Nor is the outlook better elsewhere. Musicland’s 740 Sam Goody stores are “hemorrhaging money,” partly because of declining mall traffic, says Lehman Brothers (LEH ) Inc. retail analyst Alan M. Rifkin. Musicland, which in 2002 suffered a $72 million loss on revenue of $1.7 billion, “won’t get nearly what Best Buy paid” for it, Rifkin predicts – if it manages to find a buyer. Analysts say stronger sales of games and DVDs at the company’s Sam Goody stores haven’t compensated for the falloff in music sales. Minneapolis-based Best Buy Co. declined to comment.

Stores will have to move with the times if they have any chance of survival. Later this year, for example, the London-based Virgin Megastore chain plans to test an in-store service that charges customers to download songs to portable music players. “Who knows?” says Glen Ward, CEO of Virgin Entertainment Group North America. “Maybe they’ll come back and get the album.” Who knows, indeed? After all, consider how often Madonna has engineered a comeback.

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