March 19, 2004

Requiem for the Record Store

Downloaders and Discounters Are Driving Out Music Retailers

By David Segal
Washington Post Staff Writer
Saturday, February 7, 2004; Page A01

With a total stock of more than 85,000 albums, Manifest Discs & Tapes was a music lover's mecca in the North and South Carolina towns where it operated. And despite an industry-wide downturn in CD sales in recent years, all five Manifest stores were turning a decent profit right up until the end of 2003.

So there was shock all around when chain owner Carl Singmaster announced in late December that Manifest would close all locations and lay off all 100 of its employees. There were still plenty of consumers eager to browse the bins, Singmaster explained, but his company's prospects looked bleak and were getting bleaker.

"I felt like I needed to take this opportunity to exit," Singmaster said in a telephone interview. "Indies in the smaller markets face a very risky environment."

It's not just the indies, and it's not just the smaller markets. On Thursday the parent company of Tower Records, which has four stores in the Washington area and a few dozen more in major cities nationwide, was on the verge of filing for Chapter 11 bankruptcy, according to news reports, having failed to find a suitable buyer. In September, the bankrupt Wherehouse Entertainment chain was acquired by a company that promptly said it would close 35 under-performing stores. Mall chains such as Sam Goody are hurting, too.

As pop's superstars strut down the red carpet in Los Angeles tomorrow night for the Grammy Awards, there's something close to panic in the retail trenches of the music business. The record store is in serious trouble. Sales have been hammered by Internet piracy as well as competition from big-box retailers, such as Best Buy and Wal-Mart, which are two of the nation's leading music vendors. Online CD stores, such as, are gaining momentum, too -- 3 percent of the market in the most recent survey by the Recording Industry Association of America, up from zero eight years ago.

Now a new threat looms. The market for legally downloadable music is tiny today, but the success of Apple's iTunes online music store and the rush of rival services to the marketplace is expected to gobble up an ever-larger share of the pop music pie. A recent study by Forrester Research, which examines technology trends, predicts that in five years fully one-third of all music will be delivered through modems, and the CD itself will be passe, if not obsolete, in the years after. This isn't necessarily bad news for the record labels, but it could be lethal for brick-and-mortar stores.

"I tell retailers they need to get out of the plastic business," said Josh Bernoff, the Forrester analyst who wrote the report, titled "From Discs to Downloads." "Two-thirds of the people who currently download say that when it comes to music, it isn't important to them to hold a physical object. They're done with the CD. They just care about the songs."

If that's true, the album is doomed and the industry is headed back to its roots in the '40s and '50s, when the single was the most popular format. It's already moving that way. Last week, the punk trio Green Day released a cover of the rock classic "I Fought the Law" through a promotion advertised on the Super Bowl and available exclusively on iTunes. That's a peek at the future: Hear the song one minute, own it the next.

That's a transaction that doesn't require a record store, of course. As a precedent, consider the airline ticket. Thanks to online travel sites and the advent of ticketless travel, millions of flyers no longer think of tickets as physical objects that must be printed and brought to the airport. And that's been brutal for travel agencies: in the past three years, 30 percent of them have closed, according to Airlines Reporting Corp., which keeps tabs on the industry.

Plenty of stores like Manifest have surrendered, while others believe the end is inevitable, if not yet near.

"The fat lady is warming up, but she's not exactly singing," says Mike Dreese, who runs Newbury Comics, a music chain in Massachusetts. "We're five to seven years from a complete meltdown. The only question is whether our death is in seven years or eight. Everybody's lights are out in 10."

This isn't the first time the death knell has been sounded for a segment of the real-world retail market. Bookstores were supposedly doomed by Amazon a few years ago, and by e-books after that, and yet there are still plenty of Borders stores and Barnes & Nobles -- in part because they started selling CDs -- and even independent bookshops around. People like getting out of their homes, touching the merchandise and mingling more than a lot of tech-enamored Web experts predicted.

Furthermore, most record retailers, Dreese included, aren't going quietly. Many are going loudly, by inviting bands for in-store performances that draw customers. Others are diversifying into other product categories, stocking comic books, posters and clothing lines. Others are getting into DVDs of every kind, including music, television shows and movies.

"The music store of the future will have to be an arcade," says Roy Trakin, editor of Hits magazine, a music industry tip sheet. "A place where you can try out things, grab legal downloads, see performances."

Retailers are also scrambling for a seat at the digital download table. A consortium of the biggest players -- including Virgin, Tower and FYE -- will launch their own downloadable music stores through a technology company they jointly invested in, called Echo. The idea is that Echo will allow the stores to split the cost of building a downloadable sales infrastructure, then handle transactions and downloads on separately branded Web sites.

"Our members do $5 billion worth of business now," says Echo's president, Dan Hart. "The question is, how do you leverage those assets?"

Virgin is now taking its first tentative steps into the downloadable market. Over the Christmas holiday, the company revamped its San Francisco store by adding something it calls Mega Play, a system that allows customers to listen to any album in the store. By June, says company CEO Glen Ward, the system will offer song-at-a-time downloads for portable MP3 players, and eventually there will be frequent-buyer cards that allow repeat customers to build up credits for free downloads.

"There will remain a place for the physical product," Ward predicts. "A good retailer can help people figure out what is new and what is recommended. But we'll offer the chance to buy anywhere people want to buy -- from the home, the office or in a store."

The trouble is that record stores are up against companies that can consistently beat them on price. Best Buy and Wal-Mart often sell new CDs a dollar or two below wholesale prices, using the lure of the new Sheryl Crow album, for instance, to bring customers to the stores and sell them something else, like a high-margin computer or a washing machine. Likewise, at 99 cents per song, Apple is actually losing money on each track it sells. It earns the money back, and then some, by selling iPods, which start at $249.

It's hard to beat rivals who consider music a loss leader, especially given recent trends. CD sales were down more than 8 percent, year over year, in 2002 and dropped another 2 percent in 2003. The most encouraging sign of relief arrived last month, when Nielsen SoundScan reported that sales figures for January were up 10 percent over the same month last year. The uptick might reflect a rebound in the economy, store owners say, or it could be the fruits of the Recording Industry Association of America's high-profile lawsuits against online pirates, which might have scared many people straight. Or it might be an aberration.

Regardless, many in the business blame not just the fans of file-swapping services such as Kazaa for their current woes -- they blame the labels, too.

The rise and fall of Manifest tells the story. Singmaster opened his first store 19 years ago, and since then has often been confounded by the labels' addiction to the album format. It requires fans to pay around $15.99 for, say, a 12-song disc that might have only a couple of tunes they'd like to hear. The single, once the mainstay of the record business, was getting scant attention from the labels. Eventually, as the public demand for a la carte, downloadable music became clearer, owners like Singmaster had a hard time getting in on the action.

"We said, 'Just give us access to anything that is available online,' " Singmaster says. "We'll give you 69 cents a song, just like Apple does. Just let us burn a physical CD, and we'll sell it."

Manifest finally signed a deal for a $3,000 computer system called a Starbox, which allowed customers to burn songs onto a CD, but, under the terms of a licensing agreement, prohibited staff from burning discs or creating compilations on their own. It was as though Manifest employees were teaching every customer how to make a doughnut but couldn't bake any themselves.

"Can you imagine if there was tremendous consumer demand for an 18-ounce Pepsi and we told Pepsi about this demand?" Singmaster says. "How long do you think it'd be before Pepsi started selling an 18-ounce Pepsi to anyone, anywhere? The record industry has created all these barriers, and those barriers have alienated consumers."

The downloadable music system is erecting new barriers, he says. He couldn't offer all the tracks his customers were requesting: four songs that John Mayer released exclusively through iTunes, four Johnny Cash tunes released through the same service. Then there are the deals that labels are cutting with big-box retailers, such as a Rolling Stones DVD released last year that was sold only through Best Buy. That so infuriated some store owners that they pulled all Stones albums from their inventory.

Manifest's sales sank 30 percent in the past three years, causing Singmaster to close two of the seven stores he then owned. Business at one of those, in Clemson, S.C., dried up almost overnight when the university there installed broadband Internet connections in dorms, Singmaster says.

"You can tell me all that online business went to Amazon, but I'd like to see the receipts," he says.

The five stores remaining were getting weaker but still turning a profit when, in December, Singmaster's leases were up for renewal. He decided to jump before he was pushed. He eventually found buyers for all but one of the stores, thanks in part to local newspaper coverage of the closing. Once he closes those deals, he'll be looking for a new line of work.

"I have no idea what I'll do next," he says. "I really don't have another plan." Requiem for the Record Store

Posted by Craig at March 19, 2004 05:15 PM