Retailers Move Into Digital Sales

In an effort to combat plummeting CD sales, six of the largest music retailers have formed a joint venture, dubbed Echo, to ensure their survival in a world where consumers are spending less and less of their entertainment dollars on physical music products.

Echo brings together Best Buy, Tower Records, Virgin Entertainment Group, Wherehouse Music, Hastings Entertainment Inc. and Trans World Entertainment Corp., which operates FYE, Strawberries and Coconuts, as equal partners. The consortium will offer consumers a range of in-store and online content and special deals, using what could be characterized as a supercharged loyalty card program.

Echo CEO Dan Hart said the initiative will marry the retailers' point-of-purchase expertise with the power of technology.

"I believe in the huge market potential of legal digital music, but most of what's gone on has not gained consumer traction," Hart said.

Echo is scheduled to go live before year's end. All six partners will distribute many thousands of free "starter" CDs that consumers can use to become members. Once consumers install the software, Echo will collect information on what music members play in their computers or networked devices. It will also track such data as what each member browses, plays online or downloads.

In exchange, members will get free downloads, bundled promotional packages, e-mails with artist and tour information and whatever else the retailers come up with, all targeted to a member's individual interests. Hart predicts that the retailers will be particularly interested in specials for which members need to swipe a membership card through an in-store reader.

"The message of music retail is simple," Hastings Entertainment CEO John Marmaduke said. "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 agreed: "Retail has always been about more than simply selling CDs. We are in the customer relationship business."

No specifics have been designed, however. Hart said the retailers' consortium is "approaching labels based on their existing relationships" but that no consumer offering is in place yet. Among the ideas Hart expects to see are retailers selling portable players that come with download credits, giving away CDs with content that consumers pay to unlock and in-store kiosks that have content available only to Echo members.

Echo also plans to provide a simple way for nontechnically minded consumers to become engaged in digital music because the CD and the online presence can offer step-by-step tutorials and assistance.

Hart said Echo can remedy three key points not being addressed by existing digital music products, legal or otherwise. "They're not reaching customers who have never downloaded music, they're not reaching customers who download just because they can't get it anywhere else, and they're still working on getting the licensing and pricing right," he said.

He believes that Echo provides the perfect laboratory for pricing, bundling and other experiments because its structure allows for complete flexibility.