BMG Leading Record Labels into Online Sales

In a move that is likely to push record labels into the uncharted territory of direct sales, BMG has announced its intention to add in-house sales to its network of music sites. "BMG will be moving in the fall to its own fulfillment capability because of the demands of consumers," said senior vice president Scott Dinsdale at the Business Online 98 conference in San Francisco last week.

BMG already operates BMG Music Club, one of the largest and most successful mail-order music operations. Although online sales---$50 million in 1997---account for only a fraction of the billions of dollars spent annually on music, the trend is growing rapidly. recently launched a new CD-online service that propelled its stock from $44 to over $100 per share in less than three weeks (see previous story.) CDnow, with more than half a million available titles, is still king of the online hill, but retailers like Tower Records are beginning to encroach on its turf.

BMG recently experimented with an Internet cross-promotion by bundling an America Online browser with a new album by Wu-Tang Clan. The move heralds a sea change for record labels, who have traditionally been reluctant to alienate their networks of retailers by competing directly with them. Online sales, which are frequently discounted, could undercut retailers, who would be forced to slash their already thin margins to try to remain in business. Stand-alone (or "Mom-and-Pop") stores are the first to expire in the race for survival. Large retailers like Wherehouse have already streamlined their operations to remain competitive.

Some industry visionaries see the demise of brick-and-mortar retailing as an inevitable outcome of the Internet's spectacular growth. One such is Onehouse CEO Jim Griffin, who is looking beyond the present model of distributing physical products. Griffin believes that the need for pre-recorded storage devices like CDs and tapes will eventually fade away as entertainment-on-demand becomes widely available. The former director of technology at Geffen Records, Griffin has long hammered at the industry to wake up to the changes taking place. He was adamant about this position when speaking to assembled retailers at last February's NARM convention (see previous story). "Distribution will give way to the streaming delivery of media," he reiterated at Business Online 98. "In a world where we can have all the ones and zeros we want, whenever and wherever we want, there's no reason to carry them around."

The transition from the 19th-century model of hard-goods sales and distribution to the world of totally connected instant access could take as long as 10 to 20 years, Griffin allowed. In his view, traditional retailers will be bypassed completely, thereby strengthening the position of copyright holders. The changeover won't be easy, however. Dinsdale admitted that BMG may not remain in online sales if the experiment proves detrimental to its roster of artists. "We're going to help it develop now," he said, "but we may not be there in the long term. It may not be the most effective thing for our artists."