How to Stop Record Stores from Closing

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This is Celia Hirschman with On the Beat for KCRW.

Last week, the Los Angeles Times reported that Universal Music, Warner Bros Music, EMI and Sony BMG, all suspended CD shipments to the Tower Records retail chain for non-payment. Tower is an 87-store chain based in Sacramento. It's not the first time the beloved retailer was put on a purchasing hold. Financial problems have plagued the institution for years.

Last week, all the major players on the sales side of the music business got together for their annual meeting in Las Vegas. You better believe the Tower Records situation was on everyone's lips.

Some insiders think that Tower might be withholding repayments to the labels to try and negotiate a better deal. I imagine the motivation is far more necessary than strategic.

The fact is, the current business model for traditional record stores doesn't work anymore. According to the New York Times, in the last 3 years, over 900 record stores have closed in the United States, leaving only about 2700 stores intact. The reason is, the business has changed, but the model for selling music at traditional retail stores hasn't.

Major label distributors charge a wholesale price to retailers, who buy the goods with incentive discounts and lenient repayment terms, to particularly encourage stores to stock heavily on unknown artists. This means that retailers often pay for goods before they sell them. The credit driven economics of the business has worked well in the past during a thriving music market. But when the music market is highly leveraged by low-cost digital competition, and new artists rarely break through to mass media, the economics break down quickly.

In contrast, digital music sales requires no up-front buying commitment and have unlimited inventory potential. Record labels are paid on the basis of what is sold, after it is sold, and not before.

This digital model, which is a form of consignment sales, is what traditional retailers should be demanding for themselves from the labels.

In the traditional retail environment, consignment sales would mean that retailers would take whatever inventory they wanted, and when they sold the goods, they'd pay the label.

Why should traditional retail have to compete with a digital universe that is offered better terms, lower risk and no physical space limitations? Why should traditional retail finance a record labels' production and marketing expenses in advance, without sharing any of the benefits.

Change the system of how the money changes hands, and record stores will stop going out of business.

If major record labels want to slow the trend of retailers closing, they are going to have to offer something of significant value to keep traditional retailers in business. The best thing they can offer is to level the playing field for all retailers. It's only fair, and it's really about time.

This is Celia Hirschman with On the Beat for KCRW.