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game changer

HMV Canada president Nick Williams says his company has an advantage over purely digital entities in reaching consumers. ‘The key difference between ourselves and everybody else is we have retail stores, so we can talk to our consumers. We can educate them, and sell them in value.’Fred Lum/The Globe and Mail

The Internet might have knocked the wind out of old-school music retailers, but HMV Canada is betting it can embrace the digital world without giving up on its bricks and mortar.

Restructuring specialist Hilco UK bought the Canadian chain in 2011 from its British parent, HMV Group PLC, as sales dwindled after more than a decade of music piracy. Hilco saw the clearly changing music and entertainment marketplace, but it also saw a successful, recognized brand – so the new master of His Master's Voice is trying something new at the re-energized retailer.

HMV Canada now offers The Vault – a digital music-streaming service that lets customers play nearly 15 million songs at their convenience and download their favourites for a fee. The company, already the country's leading music retailer by virtue of being the only national chain, is riding music's digital paradigm shift by offering the new streaming service, with hope that it will complement in-store business rather than hasten its collapse.

Some industry experts worry that entering the crowded streaming marketplace might be a misstep. "The chances of a breakout success are slim," says Kaan Yigit, president of Solutions Research Group consultancy. But HMV Canada president Nick Williams says jumping into the growing streaming market was an easy decision.

"We already sell music. Therefore, if you want music as many ways as you can get it, we should provide you a service to let you do that."

The Vault launched last April. While it has a music catalogue and monthly price tiers similar to industry leaders such as Rdio, Spotify and Deezer – $5 base, another $5 for mobile access – HMV Canada doesn't necessarily see those leaders as competition. Instead, the company is using the growing technology to corner a different section of the market; while other streaming services seek out users who might not be buying music, HMV is courting its loyal customers who already frequent their bricks-and-mortar stores.

Canadians love music – the country is the seventh-biggest market worldwide – but streaming music has yet to make a huge dent in the public consciousness, reaching only about a quarter of consumers. HMV Canada sees this as an opportunity to educate its already music-hungry customers on a new way to consume tunes.

The company is in a "fortunate position" to offer music in myriad ways, says Allan Mamaril, HMV Canada's senior manager of digital content and new media development. He was brought into the company two years ago, just as it was swept up and given a refocused digital mandate by Hilco.

"We can offer CDs; we can offer digital downloads; we can offer streaming. There's not a lot of players out there who can do that." That certainly holds true in Canada, where national chains such as Sam the Record Man and Music World have vanished.

When Mr. Mamaril joined the company, it already had a digital music-download store, though its sales paled in comparison with Apple's massive iTunes store. He and his team looked at global trends to assess what options they had to beef up their digital operations, and, after consulting HMV Canada's loyal consumer base (its loyalty program, Pure HMV, is approaching 1.5 million members), the company began to build The Vault.

Rather than forming a partnership with an existing streaming service, HMV Canada opted to build its own with Chicago-based VerveLife to integrate with its decades-old brand experiences. Not only does this allow customers to download their favourite tracks from the service, but it allows them to continue to see HMV Canada as the country's leading entertainment-focused retailer. The company offers subscriptions in the physical store and gives discounts to Pure HMV members to educate them about the service, and it has made sure to include "powered by HMV" in The Vault's logo, which maintains the brand's pink-highlight colour scheme.

While HMV Canada doesn't disclose subscription or sales numbers, Mr. Mamaril says that registrations for The Vault since its April launch have surpassed the company's projections.

HMV Canada is also a leading retailer of DVDs and entertainment products – music is about 30 per cent of its business – but it's keeping its digital focus on music until it masters the medium. "It's not a secret," Mr. Mamaril says, "that when we built The Vault, I wanted to ensure that if we did move to video, the platform had the capability to do so."

Music industry analyst Mark Mulligan says that streaming is "absolutely the right direction" HMV Canada needs to be taking, considering their brand history and skill sets, but warns that precedent suggests that The Vault has to "buck the trend and win out against the odds."

Converting 2013's remaining CD buyers into streaming aficionados is a difficult feat, says Mr. Mulligan, who is based in Britain. The Vault is the first proprietary streaming service from a Canadian chain store, but others have launched worldwide to mixed acclaim. Digital downloads should still be the priority to market to their bricks-and-mortar customers, as it upholds the familiar, transactional nature of buying music. Framing themselves as an alternative to Apple's iTunes is one way to do that, he says, suggesting an approach: "Remember how much you trusted us as a CD retailer? Trust us to do that now with digital."

Mr. Yigit, who has followed the company for a number of years, says the streaming music market is too fragmented for a new, unexperienced entrant to succeed. But, he adds, The Vault could work as a play to squeeze value from HMV Canada's customer base. "If they can convert a percentage of [those customers] to paying subscribers, it's incremental revenue," he says.

Mr. Williams defends the company's focus: "Streaming is a model that the music industry was nurturing and developing." But the digital market, he says, is still immature. "There's still a long way for the labels and the music industry to get significant traction outside of downloads."

Either way, HMV Canada won't be letting go of its 111 retail stores any time soon. It has refocused its bricks-and-mortar operations on mall-based stores of a few thousand square feet, rather than strip-mall locations and mega-stores, to attract attention from impulse buyers. It's working with its Pure HMV members to maximize customer input and changing its price points to sell more volume. The in-store business is still floating; in June, the company announced it had a 1-per-cent growth in sales and a 2.1-per-cent gross margin growth in the first five months, compared with the same period in 2012.

"The key difference between ourselves and everybody else is we have retail stores, so we can talk to our consumers," Mr. Williams says. "We can educate them, and sell them in value."

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