Music stops on the high street

When it comes to buying their favourite sounds, Britain's consumers are switching in droves from CDs, DVDs and other physical formats to digital – which is bad news for traditional stores such as HMV, reports Gideon Spanier

If you've been looking to buy a CD, DVD or Blu-Ray from a high street store this Christmas, it's not been easy.

The traditional store is an increasingly rare breed in the age of internet shopping and online streaming. Beleaguered HMV, Britain's biggest music chain, has already had to reduce its total number of stores – after selling off Waterstone's earlier this year – as it struggles to keep afloat financially. WHSmith barely stocks DVDs, let alone CDs, any more. And once-familiar stalwarts such as Woolworth's and Tower Records have long since closed down.

HMV, which has been slow to embrace digital, is hurting. Earlier this week, it reported sales at its retail division slumped almost 20 per cent in the six months to October, prompting the debt-laden company to warn of "significant doubt" about its future.

Three key trends have combined to put the squeeze on established entertainment retailers: the rise of the supermarkets; the growing popularity of mail-order companies such as Amazon and Play.com (which have been able to exploit offshore VAT loopholes to keep prices low); and the shift from physical formats to digital, as consumers flock to Apple's iTunes and other sites.

The biggest challenge is the transition to digital. Across the UK, CD album sales have plunged by more than a third from 151 million to 98.5 million between 2006 and 2010. DVD sales have also begun to slide from a peak of 345 million sales in 2007 to 287 million.

Those trends have continued in 2011 – despite some record-setting performances by Adele's album 21, which has sold more than 10 million CDs worldwide, and The Inbetweeners movie, which has just notched up 1.2 million sales in a week. Industry estimates suggest UK sales of CD albums have tumbled a further 13 per cent this year and DVD sales 10 per cent.

Digital has picked up some of the shortfall but those sales tend to generate far less revenue, not least because prices are lower, in a bid to combat internet piracy. In terms of UK music sales, digital has 58 per cent of volume – thanks largely to sales of singles rather than albums – but is worth just 21 per cent of expenditure. By comparison, HMV has 12 per cent of volume but 24 per cent of expenditure on music.

So the music industry cares hugely about HMV's future. Indeed, when it comes to catalogue – music outside the current top 40 – HMV's importance is even greater, generating as much as 70 per cent of all sales.

The physical high street stores also matter because they offer a shop window in a way the web cannot. When the Military Wives choir launched their single "Wherever You Are" – set to top the Christmas charts tomorrow – they unveiled it at HMV's flagship London store on Oxford Street.

Little wonder that record label bosses have been privately discussing this week how they can support HMV. Some have already extended credit so that the chain does not have to pay so much for stock upfront.

Leaving HMV aside, the interesting question is how the shift from physical to digital continues. For music singles, the transition is all but complete. Virtually all the 150 million singles sold last year in the UK were digital. Barely half a million copies were sold on CD single. Adam Liversage, director of communications at the record industry trade body the BPI, is upbeat: "In sheer volume terms, there are more singles tracks being sold in the UK this year than ever before."

However, the physical format remains surprisingly popular for albums, despite falling sales. Close to three-quarters of albums sold last year were on CD. Similarly, the amount of video sold in physical format is over 80 per cent. Blu-Ray sales, up 17 per cent this year, have helped to offset falling DVDs.

It is easy to see why physical discs remain popular, particularly at Christmas, because people want to give something more tangible than, say, a plastic iTunes voucher as a gift.

"Physical discs are what the majority of people still like to buy," says Lavinia Carey, director-general of the British Video Association. "It's what millions of people choose to do, even though they've got connected TVs and so on. There are over 40 different digital services [for film and TV streaming and downloads] out there and people are still choosing to buy physical."

She argues that physical is also popular because it is still more practical than digital. There is a "lack interoperability between devices and platforms", she says. For example, an album or film on iTunes can't be enjoyed on another device that doesn't have access to iTunes.

Some savvy companies are looking "to create a bridge between the physical format and digital copies", adds Ms Carey, pointing to how Tesco has bought the online movie rental firm Blinkbox. Now consumers can buy the DVD from Tesco and get digital access from Blinkbox bundled together for the same price. She believes a "mixed economy" of physical and digital makes sense".

Indeed, some physical formats – in music, video and gaming – are performing strongly. Steve Redmond of the Entertainment Retailers Association points out: "Blu-Ray is doing well and it's on the increase. The software sales for Xbox and Playstation are doing pretty well. Even vinyl is doing well, it's on the increase – it's an interesting example of how a physical format can flourish in the digital age, even if it's niche. If you were the kind of store that sold only Blu-Ray, Xbox, Playstation and vinyl, you'd probably be doing quite well."

Some CDs and DVDs are selling strongly too. Only last year, the ABBA-themed movie Mamma Mia notched up a record-breaking six million sales.

Redmond describes this as the "winner takes it all" trend. "The mega-hits seem to be as big as ever, if not bigger than before. It means the mid-ranking titles tend to get squeezed. Something that is niche probably isn't being affected that much."

There is no avoiding the big picture. Physical sales will keep shrinking as cloud-based storage of content becomes ubiquitous.

HMV has belatedly moved into higher-margin products such as headphones and tablets – hardware rather than content. But things remain parlous as HMV is looking to sell its profitable music venues, including the Hammersmith Apollo in London.

But whatever HMV's fate, it seems likely that there will be fewer places on the high street to buy CDs and DVDs next Christmas.

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