Wal-Mart tunes in to music downloads

DSN Retailing Today, Jan 5, 2004 by Laura Heller

NATIONWIDE DSNRT REPORT -- If anyone thought digital music services were just for kids or copyright lawyers, that allusion may be officially shattered now that Wal-Mart is playing host to a service of its own. And in typical Wal-Mart fashion, they are undercutting the leading providers.

Wal-Mart said this is only a test, and will evaluate the program before officially launching in the spring. The program allows consumers to download individual songs for 88 cents per song, besting the popular iTunes price of 99 cents.

Other retailers have announced partnerships with existing music services and development deals to build service programs, such as the Echo music consortium announced in 2003 that consists of Best Buy, Hastings, Tower Records, Trans World Entertainment and the Virgin Entertainment Group. Sam Goody recently began offering a customized music service in partnership with Musicmatch.

Echo won't launch its program until later in the first quarter of 2004, according to its ceo, Dan Hart. The initial launch will include access to individual songs and be somehow tied to CD sales, offering free downloads or exclusive tracks with purchase of an album. "That's the differentiator," said Hart. "Our goal is to maximize revenue across all channels, physical and digital." A second launch later this year will introduce a subscription-based service allowing consumers unlimited downloads for a monthly fee.

Digital music downloads may garner a lot of attention in the media, but the market for such services is still very small. Hart estimates digital music sales at less than $10 million, and according to David Card, senior analyst, Jupiter Research, the percentage of people who say they've used of sampled online music is so small, it can't even be measured with a survey.

In the 18 to 24-year-old online population, more than 70% say they wouldn't purchase music over the Internet. Period," he said. "Ten percent said they would download for 99 cents and those interested in monthly subscriptions usually number in the single digits."

The market, including online sales of CDs, was less than $80 million in revenue in 2003, said Card. "But it's growing really fast so it's an exciting market. By 2008, we project it will grow to $1.6 billion, which is significant when you consider that the U.S. music industry is an $11 to $12 billion business."

It's also an industry in decline, thanks in part to the advent of digital music, which allows for file sharing and piracy. Developing viable business models for digital delivery are critical to both the recording industry and retailers. For retailers, it also offers the possibility of a new revenue stream. As of December 2003, Apple said it had sold more than 25 million songs on the Internet. But the company also admits to making little money on the service and uses it primarily to sell iPod portable music players.

Wal-Mart, however, is not in the habit of chasing unprofitable business. "There's no doubt that we've worked to establish an Every Day Low Price," said Cynthia Lin, spokeswoman for walmart.com. "But we definitely view this a viable business model."

Best Buy has partnership agreements with monthly music service Rhapsody and offers individual downloads through Musicmatch in addition to being an equity partner in the soon-to-launch Echo service.

"Our goal is to be a one-stop shop," said Brian Lucas, spokesman for Best Buy's entertainment business. "If someone is interested in digital music, they can learn about all the different options available and can be sure we will point them in a direction that will work with what they're trying to do."

For retailers, services like Echo's offer new revenue streams. "It helps them to leverage existing assets," said Hart. "And lets them get into a new market that over time will be substantial. Any retailer can distribute another service or partner with a company. Here they can promote a company that as it gets larger and more mature, they own a big stake in it."

While Wal-Mart's entry is significant, there is still one major player in the online music world that has yet to do more than dabble---Amazon.com.

"If you're a retailer and you don't have a co-branded music experience tomorrow, you're probably not out of the game," said Card. "I don't want to say they better hurry up, it's not growing that fast, but one of the big shoes that hasn't dropped yet is Amazon. I think that the retailers will play a role, but I worry that Amazon will figure it out first."