News that sales of Apple Computer Inc.'s iPod topped 4.5 million in the final three months of 2004 and that its iTunes music store had digitally delivered more than 200 million songs looked to be the long-awaited confirmation that conventional record retailing was finally on its way out.
It's not. Industry tracking firm Nielsen SoundScan reported last year that retail sales of compact discs made up 98 percent of all album sales. The difference is that unlike two or three decades ago, much of the brick-and-mortar activity involves big-box giants like Wal-Mart Stores Inc., Target Corp., and Best Buy Co., which use their massive buying power to sell CDs at low prices.
Album sales at big-box retailers were 10 percent higher last year than in 2003, while sales at chains and independent stores dipped 4 percent and 10 percent respectively, according to Nielsen SoundScan.
To illustrate how cheap the big box stores can sell CDs, Don VanCleave, president of the Coalition of Independent Music Stores, said that independent stores often fill their CD inventories with purchases at the big boxes.
Because chain stores can't lower prices to big-box levels, they are broadening their product lines to include music-related merchandise other than the CD. "If you are not really diversified as a big box store is it will be difficult to keep stores open just based exclusively on the sales of music," said Eric Garland, chief executive of Beverly Hills-based BigChampagne, a company that tracks file-sharing.
Some chains have thrown themselves into the digital game. Virgin Digital, the digital arm of Virgin Group Ltd., launched an online music provider last year.
David Alder, chief marketing officer for the Virgin Entertainment Group of North America, said the service provides ample opportunity for cross promotions. "We will be looking at how our customers use and browse in our digital business to see how we can do about selection in the stores," he said.
John Hughes, marketing director for SecondSpin.com, which has stores in Sherman Oaks and Santa Monica, isn't fazed by the increase in iPod use. He said the store's vitality comes from its dedication to selling used CDs and music that's not mainstream.
"(Customers) kind of gravitate toward us because we are a little more independent," said Hughes. "It is a little more underground and viral than the major music labels can put a handle on."
Joe Goldmark, a co-owner of retailer Amoeba Music, said that the store's vast inventory keeps it ahead of the competition. "At Amoeba, we see ourselves as a little outside the normal industry pattern because we do both new and used, and because we are so deep in our collection," he said.
Kenn Norman, owner of Atomic Music, a single store in Burbank that specializes in rare records, said the most immediate threat to his business are places like Amoeba, not digital downloading. "A lot of the sort of mom-and-pop record stores have gone under because Amoeba is the 900-poind guerrilla," he said.
Of independents, VanCleave said, "There has been some shakeup, but people who are really smart and are building up their inventories and who are creating temples to music will stick around."
That approach, combined with an increasing share for digital downloading, may exert the most pressure on the chain stores.
Felix Oberholzer-Gee, an associate professor at Harvard Business School, believes that chain stores such as Virgin will suffer most with the expansion of the online music business. The tactile, retail experience becomes less relevant as consumers grow accustomed to new technologies and the on-demand music environment they create, he said.
"If you just go to Amazon.com, you have so much more control over the music," said Oberholzer-Gee. "The difference between the online experience and the retail experience is huge."
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