Harking back to the days of vinyl, today’s trading statement from HMV had a definite two-sided feel.
In the first place, the music and video retailer drew attention to the blood on Britain’s high streets as it reported a 1 per cent fall in like-for-like sales for the seven weeks to the middle of June.
Despite a 9.9 per cent increase in pre-tax profits before exceptional items to £136.2 million last year, the group said that trading conditions in the UK “remain difficult” and that “the outlook for the consumer remains uncertain”.
What is certain is that if you were to start up a book, music and computer retail business today, you would be unlikely to emulate HMV’s bricks and mortar plan. Rather, you would turn to a lean, mean, online business model, something rather like Amazon.com. Why bother with all those pesky overheads, such as property costs, when the internet offers a shopfront facing millions of consumers at a fraction of the cost?
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Failing that, you might look to bolt a books and music division on to a massive supermarket infrastructure, piggybacking existing branding, exploiting scale when dealing with suppliers and using floorspace that has already been built and paid for. Tesco, which has exploded on to a number of non-food markets, has followed this kind of strategy and people now routinely pick up reasonably priced CDs alongside their groceries, clothes shopping and electronic goods.
This is where the B-side of HMV’s statement came to play, outlining a plan that encompasses something of both the above strategies.
In December, the group entered into a strategic partnership with Microsoft to develop software for HMV’s digital downloading service for the UK. In so doing, it hopes to hitch a ride on the digital bandwagon while tapping into the ubiquity of Microsoft’s Windows platform.
Today HMV reiterated its commitment to the venture. “The market for paid-for digital downloads is at a very early stage and the Board believes that now is the time to take a central role in this developing market,” it said.
The company has invested £10 million, divided equally between capital expenditure and launch marketing, into a project that includes the development with Microsoft of a customised “Jukebox”, which it says will “enable customers of the new HMV Digital service to find, buy, manage and enjoy their music all in one place”.
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The software will be distributed via HMV’s network of more than 200 HMV stores in the UK, and online at hmv.co.uk, from September. The idea is to combine Microsoft’s technological know-how and HMV’s reputation as a brand that knows its music.
In truth, HMV has very little option. The group has opened 23 stores in the British Isles in the past year, along with seven Waterstone’s bookshops. But the manner in which groups such as Tesco and John Lewis have piled on to the internet shows that the retail sector’s success stories have seen that continued fortunes rest in online expansion.
Events such as yesterday’s US Supreme Court ruling against Grokster, the peer-to-peer file sharing site, bode well for legal download businesses. However, just as in the late 1990s, an internet-based business plan does not guarantee success and here, HMV should be wary.
For starters, others have been in the market for some time and have built up a considerable lead. Apple’s iTunes remains the market leader for a la carte music downloads, with more 430 million songs purchased since its launch two years ago. As far as hip brands are concerned, it will be hard to beat.
Then there’s Yahoo!, for example, which claims to be the world’s most popular website. It has also ploughed into the music market this year.
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At the same time, Microsoft undoubtedly remains the heavyweight player in software, but there are suggestions that the giant’s star is on the wane.
Critics have long argued that the American company was slow to spot the potential of the internet. Google’s search engine remains far more popular than MSN Search and Microsoft has taken to emulating Google’s press releases – announcing, last week, for example, an improvement to its desktop search tool.
Meanwhile, Microsoft’s Internet Explorer continues to lose market share to Firefox, the upstart internet browser developed by the opensource movement and available to download for free.
HMV is right to embrace a digital future, but whether it can achieve a star billing online is open to debate.