A group of big music stores has mothballed a plan to join forces on the Internet to fight on-line services such as Apple Computer's iTunes, a move that highlights painful choices brought on by a digital shakeout.
Echo, a joint venture launched with a splash of publicity in early 2003, was designed to give the big brick-and-mortar retailers such as Best Buy and Virgin Megastores an on-line foothold that would help them beat back file-swapping services and digital stores.
But mounting development costs, a glut of rivals offering bargain-rate services, and smaller-than-hoped-for sales across the on-line-music spectrum, even at Apple's successful store, have led the big retailers to pull funding for the project, its founders say.
"The reality is that compared to all the retailers' bottom lines, even Apple's music sales are insignificant," said Alex Bernstein, a co-founder and investor in the Echo project. "Our board repeatedly told us that."
The decision to halt Echo's work, at least for now, spotlights the deeply mixed feelings that many of the big offline music sellers continue to show toward digital music. Once so fearful of being replaced by Internet upstarts that an immediate joint effort seemed necessary, they are now taking a more measured approach in which their natural competitive instincts are coming back to the fore.
Analysts say that the digital market - while likely to grow over time, perhaps even to rival sales at physical stores - is still very immature, giving the retailers time to experiment and react more slowly.
"Right now, we're not forecasting the death of the CD any time soon," said Michael Gartenberg, an analyst at Jupiter Research. "I don't see [the retailers]as being overly concerned at this point that they're missing out."
According to the Recording Industry Association of America (RIAA), $11.2-billion (U.S.) worth of CDs were shipped to retailers in 2003. By contrast, estimates for sales of music downloads optimistically top out at $245-million this year, or just 2 per cent of CD sales and only a little more than double the 2003 cassette-tape sales figures.
Put another way, a little more than seven average days of CD buying would equal the revenue of one year of digital downloads at today's peak rates. While those figures will certainly change over time, they are sobering to giant corporations.
Echo was conceived in 2001 largely by Mr. Bernstein, then an independent consultant, and Dan Hart, who was chief executive officer of Echo Networks, a struggling boom-era Internet radio service. Together, the pair drew up plans for turning the old Echo into a vehicle for offline retailers' technological future.
Drawing on the pull of Mr. Bernstein's father, who had once headed the Musicland group of stores, as well as the National Association of Music Retailers trade group, the pair wangled an early 2002 meeting with executives of nine of the biggest offline retailers to pitch their idea. It took much of the rest of the year, but the seeds planted at that meeting ultimately took root.
In January 2003, six of those companies launched with considerable press fanfare, promising to use Echo-built technology to create a suite of digital music services backed by the giant retailers' brand names. A seventh member, Borders Group, joined shortly afterward.
It was Apple and its iTunes music store that genuinely shook up the market a few months later, however. From that point, Echo's future slowly clouded.
A host of Apple competitors quickly sprang up, ranging from Musicmatch and MusicNow to giants including Sony and Microsoft. Mr. Hart confidently told journalists that the Echo offering, when completed, would be more attractive, since the retail stores digital services could tie so closely into their real-world activities.
Indeed, by late 2003, Echo's team of mostly contract programmers that Echo was starting to make the ambitious service take shape. Created in Macromedia's Flash, along with an assortment of open-source and proprietary technologies, it could offer an iTunes-like store or a monthly unlimited-listen streaming service like RealNetworks' Rhapsody.
But the service would also be able to tap into the retailers' back-end databases, offering potential additional features such as digital version of an album, or making exclusive bonus tracks immediately available on-line to anybody who bought a CD in the stores.
The big retailers were having second thoughts, however. Small competitors, desperate to make money in a low-margin business, were offering the big music stores their services at bargain-basement prices.
Moreover, the sales figures themselves weren't looking good, Mr. Bernstein and Mr. Hart said. The first few weeks of Apple's store, in which millions of songs were sold to the relatively tiny audience of Macintosh computer users, had created a heady optimism among the retailers. When Apple moved into the Windows market, sales increased, but not nearly to the extent that the retailers had hoped.
The lesson they drew was that the market was growing, but it was small and would show little profit potential, at least for the near future. As the early months of 2004 came, they pulled back on funds, and the project was put slowly on hold.
Mr. Bernstein says the technology has gotten to the point where it is 100 days away from being able to launch, were the project to be re-funded, and the contractors re-hired.
Mr. Hart, who still serves as Echo's CEO, said that the company's board of directors - largely representatives of the retailers - will reconvene in three weeks and that "big news" could come out of the meeting. But for now, the project is stopped in place, he said. Others say a resurrection is highly unlikely, at least today.
"It ultimately boiled down to the idea that the numbers didn't justify a large investment at this stage in the market," said Mr. Bernstein. "It didn't make sense for retailers to stick together when playing with something that was so small. So they started to revert back to retailers' competitive sense, where the important thing was 'How do you get something a little better than somebody up the street?'"
Their joint venture on hold, the big offline retailers' digital future is less clear. A few are charging ahead, while others, like Borders, aren't yet sold on the need for immediate action. What's emerging is a diversity of plans, rather than the need for a common platform.
Virgin in particular sees a vibrant on-line presence as an important part of its future strategy, although it has outsourced the guts of its on-line service to MusicNet, the same company that powers America On-line's subscription service. As in the Echo vision, Virgin plans to have close connections between the on-line and offline stores, and Virgin-branded digital music software that will compete with Apple's iPod.
"Virgin digital exists to bring together a lot of digital media assets that no one has," said Zack Zalon, president of Virgin Digital, said in an interview after the company unveiled its plans in March. "We want to give you a seamless experience between what's on the Web and what's in your pocket."
Best Buy is less concerned about branding, serving instead as a distribution point for RealNetworks Rhapsody, Napster, and the MusicNow services.
"We want to work with the leading services that serve our customers' needs," Best Buy Vice-president Scott Young said. "It didn't make sense to us in the near term to focus on [one thing]and say that's the answer."
Waiting in the wings is at least one other retailer that hasn't yet tipped its hands: Amazon.com. As the largest on-line goods retailer, the company has long worried brick-and-mortar competitors - although Borders has teamed up with the Net giant for on-line sales.
"We're in watch and see mode," said Anne Roman, a spokeswoman for Borders Group. "We're going to see what develops, and make decisions about if and when to get into digital downloading in stores when we see fit."