[JPL] Tower's music clout has gone flat- Sacramento Bee

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Tue Aug 8 08:17:04 EDT 2006


Tower's music clout has gone flat
Retailer loses backing that bailed it out before.
By Dale Kasler -- Bee Staff Writer
Published 12:01 am PDT Monday, August 7, 2006
Story appeared on Page A1 of The Bee

Sacramento Bee

When Tower Records was on the brink of a financial meltdown three years ago,
the music industry rallied around the retailer from West Sacramento.
Record company executives, owed millions of dollars by Tower, quickly agreed
on a plan to keep supplying the legendary retailer with music as it worked
out a financial restructuring.



"Everybody was on the same page about what the strategy was and how they
were going to save the company," Carl Schnock, who was a Sony Music
executive, said at the time.
But last week, when Tower decided it wouldn't pay its debts to the record
companies, the industry struck back. Industry sources said the four major
music conglomerates halted product shipments to Tower. The move prompted
speculation among industry executives, who gathered over the weekend at
their annual convention in Florida, that Tower could go into liquidation.

The record companies' response speaks volumes about how much the industry
has changed in just three years. As music is more and more a creature of
big-box discounters and the Internet, traditional retailers like Tower
matter less and less.

"Retail is less relevant and is almost becoming irrelevant," said Barry
Sosnick, who runs a music-industry consulting firm called Earful.info. "The
industry can afford to let Tower go under."

Officials at Tower did not return calls seeking comment.

Ten years ago more than half of all music was sold at specialty retailers
like Tower. Now it's below 40 percent and falling, according to the
Recording Industry Association of America.

Retailers such as Musicland have gone into bankruptcy in recent years; Tower
itself survived a stint in bankruptcy and now owns 89 stores, or less than
half of what it had before its problems started in the late 1990s. There are
144 other stores in nine countries owned and operated by licensees.

On July 28, Tower announced it had made Joseph D'Amico, a turnaround
consultant from Chicago, its third new chief executive in four years. It
also announced it was for sale, confirming reports from back in February.

Now comes the stunning news that Tower has been cut off by the four major
record companies: Universal Music Group, Warner Music Group, EMI Group and
Sony BMG Music Entertainment. The four supply the vast majority of music to
music retailers.

The shut-off of merchandise means Tower's stores could begin sputtering in a
few weeks.

Ironically, Tower was named "retailer of the year" in the large retail
division for the third straight year by the National Association of
Recording Merchandisers on Saturday night at its convention in Florida.
According to NARM's Web site, Tower beat out such finalists as Target, Best
Buy and Amazon.com -- competitors that have been at the root of Tower's
financial troubles. NARM officials couldn't be reached for comment Sunday.

Founded in 1960 by Russ Solomon, Tower began losing customers in the late
1990s to discounters, Amazon and digital downloading, both legal and
illegal.

"I'd hate to see Tower close," said Janette Fullerton, 45, of Sacramento as
she shopped at the Broadway Tower on Friday. "I've been coming here for
years; it's an institution."

Yet Fullerton said she visits Tower less frequently these days. She chooses
instead to download music from the Web.

Three years ago Tower's financial problems reached a boiling point. The
company halted interest payments to its bondholders. Bankruptcy was a
distinct possibility.

Music industry executives convened a summit of sorts at a Los Angeles law
office and agreed to keep products flowing to Tower.

Of course, Tower was still keeping current on its debt, and Solomon was
still revered by many in the business. But there was more to it than that.

Executives who were at the L.A. summit said the agreement showed the
admiration for Tower as a "real" music store -- not a Wal-Mart. It was an
important outlet where new musicians could get exposed to the public. With
the music industry slump in full swing, it seemed like Tower had to be
saved, they said.

"The trade really believed that Tower, as a music and video retailer, was
worthy of continued support," attorney Michael Bloom, who later represented
the record companies, said in a 2004 interview.

Tower worked out a deal with the bondholders, canceling most of the debt
while giving them 85 percent of the ownership in the business. The Solomon
family retained 15 percent. Tower wound up going into bankruptcy
reorganization in 2004. But the case was a formality, needed to solidify the
deal with the bondholders.

For a while, it looked like things were improving. Tower in the past year
has opened several stores and moved aggressively into digital downloads and
podcasting.

The retailer also had been riding the DVD boom the past two or three years.
But that's petered out. The trade association Digital Entertainment Group
says industrywide sales of DVDs dropped 6 percent in the second quarter of
this year -- not exactly a free-fall, but a significant reversal for an
industry that once enjoyed sales increases of 50 percent a year.

"That was the growth vehicle," said Mike Dreese, head of New England
retailer Newbury Comics and a director of the National Association of
Recording Merchandisers.

Along with the continued decline in music sales, "certainly the last two,
three months have not been very rosy for specialty retailers," Dreese said.

Combined, the four companies are responsible for the vast majority of what's
sold at Tower or any other music retailer.
 


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