HMV has had a great 2009, with the closure of two of its main rivals in the UK, Zavvi and Woolworths, its been able to posture itself as the only real mainstream music, film and game retailer on the UK High Street. Along with this new commercial reality they have been able to focus more on their games portfolio and grow on the back of the expansion of that market.

However, they know as well as anyone, that as we continue to move into a world of digital downloads their business model will slowly evaporate. Music, as we know, can now be downloaded or streamed directly into devices, whether it be Nokia ‘Comes with Music’ phones, the Iphone/Itouch family of devices or games consoles which are now starting to push full price product through their online distribution solutions.

Hence they have invested and purchased 50% of 7Digital a UK based online retailer and distribution solutions company. 7Digital is an online retailer which also has a music streaming service. It is yet to turn a profit and is operating in crowded market place alongside companies such as Spotify (streaming) and Itunes, Amazon and many others for downloads.

This deal with HMV is wider than just music though. HMV also owns Waterstones a leading book retailer which in recent years has been trying to find its way in the digital world, playing ‘catch up’ to Amazon. 7Digital’s technology and services will allow HMV to launch an online book store and leverage the audience 7Digital already claims to have along with the current consumer base HMV and Waterstones have access to.

Yet, why go to their store? What USP will it have? Itunes were the first and their software and hardware combo are superb. Additionally they now sell a wealth of other content through the Itunes store which again gets nicely organised into their software. Amazon and Wallmart sell everything you can think of online and their music stores are there to add value and perhaps pick up extra sales. They have been very successful. But why go to the HMV/7Digital store? Will they have exclusive content? Will there be some unique software that makes their experience high value and too good to miss for the educated content consumer?

Im doubtful, and I would imagine that to some degree the HMV management are yet to come up with the answers. Perhaps the aim is to provide back end services to other businesses that want to sell content and not focus on a direct to consumer relationship themselves. As one of the last large ‘content’ retailers on the high street it will be a fascinating 5 years to see how they manage to progress from being in the physical world of business to moving to an online proposition.

Perhaps their overall strategy is to hedge their bets and add value to HMV so that they become an attractive purchase for another company, perhaps a hardware manufacturer who needs to add a digital distribution element to their business model. This would be similar to when Nokia bought Loudeye a digital music service, which then evolved into the Nokia Comes with Music proposition. For example, if Sony bought HMV, they would overnight gain access to a music store, ebook store and physical stores, some of which could be shut down, and others transformed into their versions of the Apple Store equivalent.

Music retail, as we all know, has been on the back-foot for sometime. However we have recently seen the music retail industry take some real body blows. Major retailers such as HMV, Zaavi and Woolworths were already moving music to the rear of the shop and films/games to the front. The supermarkets were even putting more shelf space to games and videos and less to music. 

2008 though saw an increase in this practise coupled with the economic crisis. First, Woolworths went bust which meant that not only music retail (mainstream music and cheap, bottom end product) loost a major presence but, Woolworth’s distribution arm also went under. It was responsible for a major cut of all music (and games/DVDs) distribution in the UK and left many major stores without product to sell. As a consequence Zaavi (used to be Virgin) went under as it was not able to fufill demand and at a time of the year when it would do most of its business, thats not good! 

Seperatly to this Pinnicle, a long standing independant distributor went under. This would have hit the small music shops and of course many, many independant labels. Once again, it was happening at the most crucial time in the industry, whether you are a label/publisher or a retailer. This is the time to sell product. 

Where does this leave us? Well, I think well see a number of labels go bust over the next 3-6 months, and many small shops leave the market place too. Zaavi might be saved, but if it is, the new owners will speed up the type of changes shops such as Zaavi and HMV have been pushing - i.e. relegating music and creating more interactive spaces for gaming and selling hardware and other physical product (clothing and what not). We will of course see a number of labels suffer too.

Once the dust settles, we might find that apart from the top 20 product, there is a much reduced demand and supply chain (to meet that demand) for CD/physical music product. I would be surprised if anyone takes the following decision, but perhaps its time for the majors to consider dropping the CD product in the UK, except for really specialist music, or music with a demographic who are not IT friendly, or for music which is clearly top 10/20 (and then, only sell it on CD for a very limited period of time). 

Either way this bad (Awful) holiday season for the UK, physical music scene has to been seen as a watershed and an opportunity to redefine the business model permanently.