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Report: Retailers in for bumpy ride with digital music distribution

(IDG) -- Caught between free music download sites and the record labels' vigorous legal assault against piracy are the traditional brick-and-mortar music stores looking to survive in a changing, often hostile commercial landscape. A report commissioned by the National Association of Recording Merchandisers (NARM) tells retailers to buckle up for a rough ride.

In perhaps an obvious statement, the report composed by the strategy arm of Internet consulting firm Emerald Solutions Inc. says digital distribution, particularly file streaming technology, will seriously disrupt the music business. Hearings in the copyright infringement trial of Napster, serve as a recent example, as do the court findings in favor of the Recording Industry Association of America Inc. (RIAA) copyright infringement claims against Inc. last month.

Emerald Solutions started its analysis from the presumption "for planning purposes, that we believe the legal system will make continued widespread piracy unlikely," said Michael Norkus, president of Emerald Solutions' strategy group. That said, online music will change the balance of power and the competitive position within the industry.

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"It separates the content from the container. The question is how will that make life different for people who make their living moving the physical goods," he said.

Online music sales have the potential to benefit all segments of the industry if companies can leverage their traditional strengths and create compelling consumer value propositions, said Norkus. Because of technological and financial hurdles in the early stages of setting up an online music store, the businesses with experience, money and a brick-and-mortar brand name are better prepared to succeed in online music retailing.

But even as retailers move parts of their business to virtual reality, physical reality isn't going anywhere. Even though the number of online music orders may increase, consumers will still want to order physical CDs and go to real stores, said Jim Donio, executive vice president at NARM.

"A lot of the soothsayers and prognosticators could have been making it look like stores are going away in a year, that CDs are going away," said Donio, executive vice president at NARM. "I think that right now, for the foreseeable future, people are confident that physical CDs in a package in a store will be the mainstay for the future. That doesn't mean that this (digital) distribution method won't be growing ... but the research says it's going to be a small part of the business."

The future threat to retailers comes not from downloads of digital music, but from streaming audio online, said Norkus. "The real surprise we think is in streaming. Streaming right now is more like radio on the Internet, and it's no big deal right now," he said. "Increasingly, streaming allows for highly targeted content, almost to the point of listening on demand. The streaming business is quite different from the record retailing business, and the skills and competencies are not directly transferable."

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Emerald Solutions
National Association of Recording Merchandisers

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