Tower's Me-Too Game Plan - Company Operations

Industry Standard, The, April 2, 2001 by Hane C. Lee

While record companies gear up to sell directly to consumers, Tower Records fights back by starting a label of its own.

FROM THE PARKING LOT, THE TOWER Records store in Larkspur, Calif., looks like any other of the chain's 194 outlets. Tucked into a strip mall 15 miles north of San Francisco, it's festooned with huge posters of Lenny Kravitz and Aerosmith and dotted with shoppers and staff bobbing to high-volume techno grooves.

But behind a door in the far right corner of the cavernous store, the space once filled with classical music discs has been converted into a simple office with bare white walls - headquarters for 33rd Street Records, the indie label Tower launched last month.

Like its sparse office, 33rd Street's business plan is modest. Tower Records CEO Michael Solomon says the retail chain will issue a half-dozen albums a year, an annual investment of about $1 million for the next three years. The bare-bones approach allows for fast profits: An album will be in the black after selling just 20,000 units.

That number might seem small - Aerosmith's new album sold more than 10 times that in a week - but it reflects a big change in the music business. As record labels try to co-opt digital distribution technologies like Napster's songswapping software, retailers find their role as primary distributor threatened. Tower's answer: If the labels can be retailers, retailers can be labels.

For Tower, this struggle is playing out in that back office in Larkspur. Solomon's idea is to use Tower's worldwide retail network to promote the label's own artists, giving in-house CDs prime display space. The company's staff helps identify promising unknowns. One of the first artists signed, San Francisco Bay Area rock singer Noelle Hampton, was recommended by a consignment manager who works in the Larkspur store. Modern-rock duo Settie and pop punk band Align round out 33rd Street's fledgling roster. "We're hoping to tap in at the ground level of our stores, as an A&R function," says Morty Wiggins, the former A&M Records and Bill Graham Presents exec who's heading up 33rd Street. Adds Solomon: "I always thought we could have great synergy between making music and selling music?."

There's more than just synergy behind the move, though. Like manufacturers in many industries, record labels have been dependent on retailers to move their products. But the Internet lets labels cut out the middleman. Buyers can now pop Sony Music CDs into their PCs and connect to the label's online stores. German media conglomerate Bertelsmann bought online music retailer CDnow last summer, saying the site would play a big role in the firm's digital delivery plans. And thanks to the Napster phenomenon, consumers are downloading music without going through stores. (Bertelsmann also bought into Napster.)

Now retailers are fighting back. Best Buy launched its own music label, Redline Entertainment, in late 1999. After issuing two swift-selling compilations, it released Pete Townshend's latest CD last fall.

The role reversals haven't changed the basic formula behind the music: Major record labels still produce 83 percent of all music sold, and traditional retailers handle all but a tiny percentage of sales. That means all of these initiatives, including Tower's, are largely experiments. And that's always the place to look for change.