Demise of Tower Records sign of new digital age

by Rob LeverSun Aug 27, 6:02 PM ET

Who killed Tower Records?

The Internet seems to be the prime suspect in the demise of the pioneering music retailer, which filed for bankruptcy earlier this month for the second time in two years for its US stores.

But analysts say the rise in digital music downloads is only one of several factors in the failure of Tower, which started music superstores in California in the 1960s and expanded to global markets.

Tower, whose non-US operations are not affected by the bankruptcy filing, failed to keep up with a fast-moving landscape involving online retailers such as Amazon.com and discounters like Wal-Mart, as well as a move to digital music, say analysts.

The collapse of Tower "is a sign of the evolution of music," said Phil Leigh, senior analyst at Inside Digital Media, a market research firm.

"It's pretty clear that recorded music is going to Internet distribution and right behind it will be video entertainment."

Global sales of music CDs fell 6.0 percent in 2005, according to the London-based International Federation of the Phonographic Industry, while digital sales rose 188 percent. This trend has been similar for the past few years.

But digital music downloads made up only about five percent of overall music sales, the data showed.

David Card, analyst at technology firm Jupiter Research, said blaming downloads from Apple's iTunes and others for Tower's demise is "just ridiculous."

"The transition to digital music has not happened by any stretch of the imagination," Card said.

"Music sales have been declining steadily since 1999, for a number of reasons, such as competition with DVDs and video games, aging baby boomers, maybe a bit of file-sharing, and only very recently digital downloads. Digital music is chump change compared with sales of CDs."

Card said he and other music fans still enjoy music CDs, which have several advantages over digital downloads because they have better quality, can often be copied without restriction and backed up.

"If I want to buy something cheap or try a new band, maybe I'll go for the cheapest which is digital, but all else being equal I'd rather have the physical product, and I'll pay a few dollars extra for it."

Among the problems facing Tower and other retailers are shrinking sales of music and thin profit margins.

Wal-Mart probably hurt Tower by slashing prices on music CDs, using this as a "loss leader" to get customers in stores, said Card.

At the same time, Apple has dominated the online music business with a price per song of 99 cents, of which 70 cents goes to record labels, said Leigh. Even though this generates little profit, Apple uses this to promote sales of its iPod music players.

Still, the analysts say there may be ways to make money in music retailing for companies like Tower, which hopes to find a buyer for its US operations.

Card said a company like Tower needs to marry the advantages of stores for promotions and appearances with the convenience of online sales and digital delivery.

"If you have physical stores and digital service I think you can do things," Card said.

"A store is a place where you can show things, make an entertainment experience. I believe music retail can make it if someone can put together a one-two punch with digital stores and physical products. For example, you could buy an album online and pick it up in the store."

Leigh said Tower "could have done a better job of leveraging their brand in cyberspace," to compete with Amazon.

Overall, he said the lesson is that companies must adapt to changing market conditions.

"Tower was one of the biggest, and if evolution has taught us anything, it's not the biggest of the species that survives, it's the species most adaptable to change," he said.