Internet Distribution Threatens Music Retailers

"Adapt or die" is the first law of economic Darwinism. It's a choice that many music retailers are beginning to face with the rising tide of alternative distribution channels. According to market research organization Jupiter Research, online music services will account for approximately 9% of all CDs sold this year, a 50% increase from 2000. Retailers, once the music industry's only sales interface with the buying public, are looking at what might be an increasingly marginalized future. Those who wish to stay in the game may become "affiliates" rather than independent distributors.

Music subscription services like MusicNet and Pressplay will also take a bite out of traditional retailers' bottom lines. Distributed by RealNetworks, America Online, and Napster, MusicNet is a joint venture by RealNetworks, BMG Entertainment, EMI Recorded Music, and Warner Music Group; Vivendi SA's Universal Music Group and Sony Music Entertainment are behind Pressplay, which recently signed a deal with Yahoo! An agreement announced July 12 between Pressplay and Microsoft will put the music service on the MSN Music website; Pressplay will use Microsoft's Windows Media software to deliver music to MSN Music subscribers.

Internet distribution deals and subscription music services are new, more efficient business models for the music industry. The industry would clearly prefer to rely less on traditional retailing, which from the manufacturers' perspective has always been a cumbersome method of reaching customers. Retailers, fearing obsolescence orchestrated by record labels, are seeking protection through legislative intervention and public awareness campaigns.

Earlier this year, a Tower Records executive told a US Senate committee that record labels were hedging on previous digital distribution deals because they would like to sell directly to the public—or as directly as is legally possible. A mass mailing to record labels from retailers' trade organization the National Association of Recording Merchandisers (NARM), seeking reassurance that its members won't be cut out of the distribution picture, has received only a couple of cursory responses, according to NARM president Pam Horovitz.

NARM has also raised anti-trust issues regarding record labels' new agreements. "I think we need to be very concerned when a handful of companies control the copyrights and increasingly control the pipes as well," Horovitz said. Lawmakers have expressed concern for retailers, but have not enacted any legislation to protect them, as was done when a nationwide coalition of auto dealers campaigned to protest plans by automakers to sell direct through the Internet. Independent travel agencies and ticket outlets are among the many businesses threatened by consolidated Internet-based operations. Like record stores, they haven't found much help in Washington.