Retailers Echo Majors' Online Presence

Word that a consortium of six of the largest music merchants in the U.S. plans to launch a digital-music subscription service to rival such major-label ventures as MusicNet and Pressplay marks retail's most aggressive move to date to embrace digital distribution.

The retailers in question—Best Buy, Hastings Entertainment, Tower Records, Trans World Entertainment, Virgin Entertainment Group, and Wherehouse Music—have tinkered with promotional and commercial downloads via the likes of Liquid Audio and Rioport for years. But concerns regarding everything from revenue sharing and pricing control to customer-data ownership have kept them on the sidelines in the on-demand subscription business, until now.

With CD sales in a tailspin and competition in cyberspace rising, the consortium's members are hoping to use the venture, called Echo, to control their own destinies in the subscription arena. Retailers are billing Echo as a vehicle for collecting content licenses and providing back-end technology services that will power autonomous merchant-specific offerings.

The move also represents a bet by merchants that they can drive consumer adoption of online services better than rival media and Internet companies by using in-store promotion and sales of physical CDs to drive subscriptions. Ideas include bundling Echo start-up discs with physical-goods purchases, offering access to free downloads with the purchase of a CD, and offering locked content in bulk that could be transferred to iPod-like portable hard-drive devices and later opened.

But specific details surrounding the venture are limited. The retailers have each invested an equal, undisclosed sum in Los Angeles-based Echo, formerly Echo Networks, a streaming-music service.

Echo founder Dan Hart will head the new company, in which the consortium holds a controlling interest. Representatives from the six retailers— as well as Arnie Bernstein, former president of the National Assn. of Recording Merchandisers, and Strauss Zelnick, former CEO of BMG Entertainment and an Echo investor through ZelnickMedia—will serve on the Echo board of directors.

Each of the retailers will launch their own branded service, using Echo as the engine, and will control pricing.

Beyond that, there is still much to be decided. Echo has not actually inked a distribution deal with any of the six retailers yet. And an investment in Echo does not necessarily preclude the retailers from cutting deals with other services. (In fact, another leading on-demand music offering says it is in advanced talks regarding a distribution agreement with an Echo investor.) Plus, Echo still has to acquire content licenses from the labels—a process company executives say they hope to complete in the next six months.

But those in the digital industry view the venture as a potential serious rival that even in its nebulous state commands instant legitimacy, courtesy of its backers.

"The Echo consortium was established to create a viable business strategy that combines physical and digital-music distribution," Hart says. "Music retailers can utilize their long history and expertise in building customer relationships, marketing music, and breaking new artists to provide a digital-music experience that truly serves the consumer."

Hastings Entertainment CEO John Marmaduke adds, "We have always excelled at selling music to consumers, and we plan to extend our consumer relationships from the physical world into the digital world."

Wherehouse Music CEO Jerry Comstock notes that the initiative reflects that retail has always been about more than simply selling CDs. He says, "We are in the customer-relationship business."

Alan Malasky—of Porter Wright Morris & Arthur in Washington, D.C., and antitrust counsel to Echo—says the deal will bring what he calls "real competition" to the digital-music marketplace: "Under the terms of the venture, each retailer participant will independently market and price the digital-entertainment products it offers, in the manner that will best serve its consumers."