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Music and the Net: Take two

Can music retailers turn illegal file-swapping to their advantage? Pamela Horovitz, president of the National Association of Recording Merchandisers, explains how store operators are learning to put hard lessons learned about the digital age to good use.

It's not the easiest time to be selling music the old-fashioned way.

For all the record labels' complaints about online piracy, it's the traditional record stores that have borne the brunt of falling music sales. Even a retailing stalwart like Wherehouse has declared bankruptcy, while the likes of Tower Records is skating on the edge of insolvency.

But Pamela Horovitz, president of the National Association of Recording Merchandisers (NARM), sees light at the end of what has seemed to be an ever-lengthening tunnel. The next year, she says, just might be the one where offline retailers figure out their role in the digital world.

Horovitz is not given to unreasonably optimistic pronouncements about the Internet's effect on retailers' business. She and her organization were among the early critics of the record labels' online subscription services Pressplay and MusicNet, fearing that these Net services were aimed at cutting retailers out of the music sales loop.

Those strained relations are now easing and retailers are finally launching their own ambitious online efforts, though it's too soon to say whether labels will actually support them. Horovitz spoke to CNET about file-sharing and how she thinks music retailers can put hard lessons learned during the digital revolution to their advantage.

Q: What are the biggest issues for music retailers online this year? What are you thinking most about?
A: I think this is going to be the year in which the dynamic tension between the problems of the Internet for retailers eases. (I'm talking about) the degree to which file sharing and unauthorized downloads cannibalize sales, and the degree to which file sharing can be used as a promotional vehicle, for example.

I think ultimately what people are going to come to realize is that free wasn't free.
Are retailers looking at file sharing or other similar technologies as a promotional tool?
There has certainly been a lot of talk about ways to use instant messaging, for example. We recognize that word-of-mouth marketing was actually an important part of how records got started. It's a fact that we want to keep word-of-mouth alive and well and living on the Internet. But we want to harness it so it can build careers. We haven't completely figured that out yet.

Do you see specific promising signs for retailers online?
This is the year where there really are a couple of vehicles that are retail-driven for digital distribution. There was the (subsequently terminated) Alliance acquisition of Liquid Audio. There's the Echo (retailers' digital distribution) group. Those are two that come to mind. As general rule of thumb, there is now more of a recognition that this isn't just about throwing a buy button on a Web site, that there is a value to what retail has added to the equation.

What then is the likely sequence of events?
It took a while to get to the place where retailers felt they could invest in infrastructure, as opposed to looking over their shoulders and wondering whether they were going to lose their role in the process completely. The rubber has not quite hit road yet with license agreements (with the record companies) in place. But I would expect that (to happen) this year.

You've had concerns about the record labels' online activities and their effects on retailers. Is that still on your mind?
I don't think the concerns have been totally allayed. We want to stay talking in a policy sense, and stay in marketplace negotiations. But there are more discussions going on now than there were last year, and that's a good sign.

The labels' online subscription services have had their own trouble getting the kinds of distribution licenses they want. Are you still concerned about those efforts?
Ultimately, consumers are going to make their own decision. But I think to the degree that there has been a steep learning curve for content owners, it's been a good thing. It has made them more respectful of what we're all about. There are a lot of components in managing a relationship with customers

We've got a lot of key decision tree elements facing us this year. One of them is going to be what's the timeline and ultimate equilibrium between the delivery of digital and physical goods. You have this dichotomy between what's a service and what's a product. There is an element of what needs to be the relationship with consumers. How do we have a direct role versus being a middleman? How do we manage relationships between each other, and not just with the consumer? What's the difference between a stream and download?

We're in a time when we're going away from a marketplace governed by scarcity on shelves and scarcity on the airwaves, to one where in which the economics are governed by ubiquity.

That seems like a difficult position. If a product is ubiquitous, by definition it's harder to have a market, isn't it?
Well, I have to disagree. I think ultimately what people are going to come to realize is that free wasn't free. The services that consumers are going to value are going to have different elements. You can stand in line, for example, but there is a value to not having to stand in line. There is a value to having someone arrange and select and recommend music for you.

We're getting more open to trying new things.

In some ways I really enjoyed going through my own music collection recently and organizing it after I got an iPod. Part of that was terrific, because I was very much engaged. Any time that you have people engaged with their own music, that's a great thing. But there are times when I really would prefer to have it done for me. These are things that retailers have done to some degree, and we probably will have to get better at doing that.

So retailers might have to stop thinking about their business as selling things, and become services?
You know the old saying, "content is king"? Well, content is where you start. The customer is king. There is plenty of room for subscription services as well as music purchasing, for example. We haven't been in that dichotomous world long enough to see how well they coexist yet.

Maybe what you want is a subscription service for your car. Maybe you want a subscription service at your beach house. At home, where you've got kids, and you still want to give them the ability to play with stuff, maybe purchasing is the right option. Mostly, I'm saying we don't really know yet. But we're getting more open to trying new things.