Kill the Music

How bad have things gotten in the music retail industry? Just a few days after Virgin launched its low-cost airline earlier this month, it unloaded the last of its 11 company-owned Virgin Megastores in the United States.

Think about that. Virgin believes that running an airline in the cutthroat travel industry -- where legacy carriers have lost billions of dollars in recent years -- is a smarter business decision than selling CDs through its superstores.

Ouch!

Virgin's not the only one bailing out. Everywhere you turn, selling prerecorded music on CD is proving to be a real tough gig. Take Hastings Entertainment (NASDAQ:HAST), for example. The media retailer sells a little bit of everything, and it posted a great quarterly report earlier this week.

Here's how the company's comps performed in its major merchandise categories. Can you spot the odd line out?

Yes, music is the only declining category at a chain that seems to be bustling nearly everywhere else. Want more proof? It's your lucky day, because the carnage is everywhere.

Music, music everywhere, but not a disc to drop
It's been more than three years since CD-store owner Trans World Entertainment (NASDAQ:TWMC) posted a quarterly profit outside of the seasonally-spiked fourth quarter. Last year's liquidation of Tower Records from bankruptcy court was bad, but I'm sure your own neighborhood has probably lost a few good mom-and-pop chains as well.

When's the last time you stepped into a CD shop? I'm not talking about a consumer-electronics superstore that sells CDs as loss-leaders, or that artsy bookstore that stocks jazz and classical CDs upstairs. When's the last time you set foot inside a retail store that specialized in selling prerecorded music? If you have to jog your memory to drum up an answer, you're not alone.

CDs aren't selling. Digital music is. CD stores used to be cool places to browse the racks for new music. If you warmed up to the staff, maybe you'd even be treated to a few sample cuts played in-store. You don't need that anymore. Retailers like Amazon.com (NASDAQ:AMZN) offer 30-second samples. Napster (NASDAQ:NAPS) offers entire lo-fi streams for free. Websites like Pandora, Slacker, and iLike help unearth new music that you may enjoy, while deep playlists on satellite radio ensure that you never have to hear the same songs over and over, as in the old days of heavy-rotation terrestrial radio.

So when was the last time that you stepped into a record store? Did it smell of vinyl? How was the eight-track collection? Yes, it may very well have been that long.

The place where you used to buy the hot release from that new band on MTV, or where you went through a box of doughnuts as you camped out for concert tickets, feels more a shot of nostalgia than anything else. Everyone knows that MTV doesn't play a whole lot of music these days. And unless you've been living under a rock (of the non-rolling variety), it's easier than ever to score great show tickets online through places like IAC/InterActiveCorp's (NASDAQ:IACI) Ticketmaster or the resellers at eBay's (NASDAQ:EBAY) StubHub these days. 

A whole latte love
I pondered the fate of the CD itself back in March, shortly after Nielsen SoundScan reported that compact disc sales were off by 20% year over year during the first quarter of 2007. It hasn't gotten much better. Global CD sales peaked in 2000.

Labels blame music fans for illegally downloading music. Fans blame the labels for signing lousy artists. But there's no sense in pointing fingers. This industry's crying for change, and may find itself with an unlikely savior in Starbucks (NASDAQ:SBUX).

Yes, Starbucks. Established artists are flocking to the java retailer's Hear Music record label, even as the majors trim their rosters. As CD retailers buckle, Starbucks has opened Hear Music lounges that blend music retail with the company's coffee concoctions. Starbucks has also opened "media bar" tune-sampling kiosks in select locations.

Maybe Starbucks will prove as humbled in this fading industry as more traditional CD outlets. Maybe not. What if the key is to sell not just music, but an overall experience? Starbucks may be on to something here.

Let's just hope that the Seattle company's experiment doesn't wind up in the eventual launch of Starbucks America, the airline. I dread the day I find myself on a plane, only to hear, "Coffee, Tazo, or Frappuccino?"

Amazon.com, eBay, and Starbucks are Stock Advisor recommendations. If you can't score free music, how about scoring some free stock picks. A free 30-day trial subscription sounds like music to your ears.

Longtime Fool contributor Rick Munarriz can walk from his home to nearest Starbucks in all of 10 minutes. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's disclosure policy vows that wax cylinders will never die.