Retail CDs get personal

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CHICAGO - Executives from the world’s leading record companies and the owners of the nation’s struggling music sellers have been huddled in a Chicago hotel since Sunday, trying to figure out how to halt a slide in CD sales while providing music fans with new reasons to shop at a store.

When the attendees of the National Association of Recording Merchandisers leave town Thursday, they’ll have a little more knowledge on how to adapt to an increasingly digital music market, but also a sobering sense that things aren’t getting better soon.

A report released Wednesday from Ipsos Insight, a Chicago market research firm, showed that while 51 percent of U.S. consumers ages 12 and up bought a CD in the past six months, that’s down 15 percent from 2002.

Furthermore, a Sony executive said Wednesday that a 6 percent increase in online music sales in the first quarter hardly offset decreases in physical CD shipments, which were down 20 percent.

“The numbers are what they are,” said Jim Donio, the association’s president. “Huge challenges exist for this industry. That’s why people are here trying to figure it out.”

CD sales have dropped steadily during the last decade because of a number of factors. Illegal song downloads are still prevalent, with some estimates concluding they still outpace legal song purchases. Also, consumers and even record storeowners say the cost of a physical CD is too expensive, particularly in an era when consumers can download just one or two songs.

Yet that trend is leading to one promising tactic for retailers: selling digital singles. Just as people sit at home and buy songs from Apple Inc.‘s iTunes for 99 cents a pop, several vendors have introduced a bricks-and-mortar version of that concept.

New machines, available from at least five different companies and now in operation in more than 150 record stores, Starbucks, book stores and big-box electronics stores across the country, allow consumers to pick 15 or so singles from various artists and burn them onto a CD.

George Daniels, who has run George’s Music Room in Chicago for 38 years, installed one such machine, the Disc-Go Digital Studio, at his store.

“I love the idea of this machine because it puts me back in the singles business,” said Daniels, who started his store with $100 and 100 45-rpm singles. “It will add something new to our store. A lot of people are willing to pay $1 or $2 for a song, but not $15 for a CD.”

While it’s too soon to say if the machine will help offset the “considerable downward trend” at George’s Music Room, customers are interested. The store’s phone had about 50 voice mails from customers the day after Daniels talked about the new technology on Herb Kent’s radio show on WVAZ-FM 102.7. Retailer Dan Kealey has been using four Mix & Burn machines at his Replay Music, Movies and Games store in suburban Minneapolis since late 2005.

“We’re bringing in new customers every week with this,” Kealey said. “Once the customer uses it, they are hooked. They love creating their own compilations.”

There are other benefits too.

For one, the machines provide a “virtual inventory,” Kealey said, offering a far greater supply of music than the physical CDs most stores can stock.

The vendors have agreements with record labels to sell these downloads legally. Depending on the system, roughly 2 million songs are available. The music is stored on store-based servers that are connected to the Internet.

Also, the software on the machines, like iTunes and a growing number of music-based Web sites, can recommend artists a customer might like based on past purchases.

“Those artist recommendations keep them burning,” Kealey said. “Customers compliment us on how good the recommendations are.”

Finally, as it can take about 5 minutes to burn a store-made CD, a process some retailers stretch out to about 15 minutes, customers keep shopping, said Douglas Lower, a product manager for MOD Systems, whose machines are being tested in some East Coast Starbucks.

The cost of the do-it-yourself CDs varies depending on the retailer, but typically each song costs 99 cents after a $3 fee to cover the costs of a jewel case, customized labels and a CD. So burning one song costs $3.99 but burning 10 would cost $12.90.

Coming soon, customers will be able to plug an MP3 player or a music-playing mobile phone directly into these machines, paying only 99 cents for a song.

But that will come with a big caveat: Those songs will have digital rights management software included, meaning customers will only be able to make a limited number of copies.

And, because of those digital rights restrictions, customers can’t plug in an iPod. Only MP3 players and phones with Microsoft Corp.‘s Plays For Sure software will work.

There are no restrictions when songs are burned to a store-made CD, however, just like there are no restrictions to how a customer can use a store-bought CD.

Hence, you can rip your store-made CD into iTunes or Windows Media Player and then transfer songs to a phone, an iPod, or burn a separate copy for your car.

For record sellers and even the record labels, solving this digital dilemma boils down to a simple notion: give customers what they want in the format they want.

“We used to do business with just one product,” Thomas Hesse, president of Sony BMG Music, said during a presentation Wednesday. “Now we do business with many products.”

He pointed to song downloads, CD sales, ring tones for mobile phones and even video singles as products Sony aggressively pushes.

For Justin Timberlake’s 2006 release “FutureSex/LoveSounds,” for example, Sony created “71 pieces of content,” Hesse said.

That translated into 14.5 million units of “something” being sold. Those something’s included 5.4 million ring tones, 3.7 million digital song downloads but only 201,000 digital album downloads.

That compares with 2.9 million CDs sold, underscoring that people still prefer to buy CDs in the physical format.

“Consumers want more music than ever,” Hesse said. “But they want multiple products at multiple prices.”

Kealey agreed.

“I want to offer all forms of music delivery to get people to come back into my store,” he said. “We have to find ways to keep them coming back.”