Small Business

From Bricks and Mortar to Digital Music Master


As music merchants struggle to adapt their business models, one New York shop is embracing the Web

Josh Madell needs to invent a new business model, and soon. The 37-year-old co-owner of Other Music, a New York retailer specializing in obscure CDs and vinyl, has watched sales slip sharply as music buyers move online. While his company, in business since 1995, remains profitable, he and his staff of 15 are trying to find new ways to make money, using the same technologies and trends that upended their old business model to build a new one. He is thinking beyond Other Music's core retail business. "If we tell ourselves we have to make our living selling albums or even just selling music, we are bound to be passed over," he says.

The Internet has steamrolled music retailers (BusinessWeek.com, 10/10/07). As consumers fill their iPods with digital downloads—legal and otherwise—the ranks of CD buyers have dwindled. One in four U.S. record stores around in 2002 was gone by 2005, according to U.S. Census data—a net loss of 1,900 stores. But the data suggest that small retailers fared better than large ones. The number of stores with fewer than 100 employees shrank by 18.6% in that period, compared with 34.3% for stores with 100 or more workers.

Other Music noticed CD sales slipping as early as 2000, when free file-sharing programs such as Napster (NAPS) let anyone with a high-speed connection pull music files off a peer-to-peer network. But Madell says the wake-up call that his business would have to adapt quickly or close shop came only during the past two years, with CD sales shriveling fast as digital downloads exploded. Worldwide digital sales mushroomed to $2.9 billion in 2007, up from $20 million in 2003, according to IFPI, a London record industry group. It says online and mobile downloads accounted for 15% of all music sales last year, across more than 500 digital services.

Small Is Beautiful

Music industry experts say small shops have some advantages over chains. Used CDs and vinyl records have higher markups and attract collectors, giving independent stores an edge, says Aram Sinnreich, co-founder of Radar Research, a Los Angeles media and technology consultant. "These small retailers are the kinds of places that build musical communities in ways that Wal-Mart (WMT) and Best Buy (BBY) and even Tower Records never really could," Sinnreich says. Tower went bankrupt in 2006 and closed its U.S. retail stores, including one just a block from Other Music.

Madell says he expected the chains to go under before independent stores. Casual customers more interested in singles than albums can download their fix more easily than the fanatics who haunt places like Other Music. And the Internet exposes more fans to artists beyond those played on the radio or MTV. "I think the market for interesting, underground, cutting-edge music is bigger than it ever was," Madell says. "How to capitalize on that market and make it a real business is another question."

Small companies in many industries disrupted by technology face similar challenges, but Madell believes creative thinking and hard work will see entrepreneurs through. So what's his strategy? Madell wants to bring the experience of shopping at the hip record store to the Web.

Last year, Other Music launched a digital download store that now accounts for nearly a quarter of the company's sales. Labels and artists that aren't featured on iTunes (AAPL) and other digital stores turn up on Other Music Digital first. The company also sells vinyl rarities on eBay (EBAY) and mail-order albums through its Web site.

The company's first online venture began nearly a decade ago with an e-mail newsletter reviewing new releases. The update now reaches 25,000 subscribers, and Madell calls the blurbs his staff writes crucial to the store's role as a tastemaker in the music world. "The people who work at the independent record shops tend to be the specialists and really know what they're talking about, and that's a real advantage when it comes to being online," says Andrew Dubber, a music industry consultant in Britain and author of the blog New Music Strategies. Dubber says stores should try to capitalize on that expertise by helping consumers find what they like amid the near-boundless choice of the Internet (iTunes boasts 6 million songs).

Wooing the Aficionados

While Other Music expands its online presence, it is also trying to keep its brick-and-mortar operation relevant. The store sells tickets to local concerts and hosts free in-store shows. Both get customers in the door and build the Other Music brand as a place for aficionados. The in-store shows are recorded and archived on the store's Web site, along with artist interviews, which can boost sales online. Madell hopes to have sponsors underwrite the video series soon.

Using digital media to connect customers with music they like, and with other like-minded fans, may be the best bet for independent music shops, says Sinnreich. "I would be working hard to integrate tools like Meetup and Facebook into their site, so people could get together and have listening parties or set up ad hoc concerts," he says.

None of this is easy. Madell likens it to starting a new venture, and he says entrepreneurs struggling to revamp obsolete business models need to commit to the same kind of effort. But as grim as recent years have been for music retailers, Madell sees reason to hope. "I feel like there's a lot of opportunity if you're willing to shake up your way of thinking, and approach things in different ways and experiment and take chances," he says.

Flip through this slide show (BusinessWeek.com, 4/21/08) for a look at strategies Other Music is using to adapt to the Web that you could borrow for your own business.


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