Troubles in Musicland

Big changes are afoot in the music retailing world. Last week, yet another music and video retailer -- Musicland, the privately held parent of mall-based retailers Sam Goody and Suncoast Motion Picture -- filed for Chapter 11 bankruptcy protection.

The announcement probably won't come as a big surprise, given the ongoing changes in how audiences consume music and video. Even two years ago, it was apparent that many of the old-school music retailers were having difficulties changing along with the industry as a while. (Tower Records had a similar set of troubles in February 2004.)

The bankruptcy is a far cry from mall-based Musicland's mightier days; for a while, its current rival Best Buy (NYSE: BBY  ) owned Musicland, but it was unable to rejuvenate it. Musicland has suffered years of financial losses, last posting a profit in 2001. Best Buy sold it in 2003, receiving no cash for the sale to a private-equity firm.

Leading the bricks-and-mortar concerns' worries: Apple's (Nasdaq: AAPL  ) impressive rise in music with its iTunes Music Store. Back in November, we learned that Apple's iTunes had broken into the Top 10 list of music retailers, joining Amazon.com (Nasdaq: AMZN  ) , Wal-Mart (NYSE: WMT  ) , Best Buy, and Target (NYSE: TGT  ) while leapfrogging Borders (NYSE: BGP  ) , Tower, and, yes, Sam Goody. And of course, digital downloading has shown more promise as CD sales continue to flag, although digital downloading still represents just 6% of the music market.

Musicland's Chapter 11 filing won't have a major impact on its operations. You'll likely still find Sam Goody and Suncoast stores in your local malls, although the company does intend to pare down its store count -- not that customers will necessarily notice the absence. The bankruptcy reorganization is meant to help Musicland exit unprofitable leases. It seems Musicland will survive this process, but it's still hard to assume that it will find a successful niche, given the current trends.

Companies like Musicland face an uphill battle in a highly competitive industry. Despite its status as a privately held concern, which means it lacks any particular interest to us investors, word of its Chapter 11 filing further underscores the industry trends many of us are tracking. With the entertainment market divided between discounting (Wal-Mart, Target, and Best Buy all spring to mind) and convenience (iTunes, Amazon, and Netflix (Nasdaq: NFLX  ) , for example). Meanwhile, other forces make companies like Musicland's positions more difficult; the so-called Long Tail Effect, in which online stores leverage their near-limitless capacity to offer a more diverse selection of obscure and out-of-print titles, is one factor working against bricks-and-mortar retail stores.

Despite the bankruptcy filing, Musicland clearly hasn't peddled its last CD or video. However, with so much change sweeping the market, it's easy to wonder how much longer similar retailers can hold on to their customers.

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Alyce Lomax does not own shares of any of the companies mentioned.


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