Music Downloads Drive a Back-Catalog Business Opportunity

Mitch Koulouris once worked as a manager for the now-defunct Tower Records retail chain. Five years ago he realized digital music distribution was the wave of the future. Now his company, Digital Music Group, Inc., is buying up old song catalogs and selling them online.

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STEVE INSKEEP, host:

Music industry trade groups and music downloading sites, like Apple's iTunes, Napster, and eMusic, earned more than $5 million last year. The music on these digital shelves comes from the major record labels and from what are called aggregators; these are middlemen who represent small and independent labels.

As NPR's Felix Contreras explains, there is one aggregator who's added a successful twist to the business.

FELIX CONTRERAS: The recent demise of music retail giant Tower Records has been seen by many as a symbolic end of the brick and mortar record store. Mitch Koulouris was ready for that shift. He worked as a manager for Tower during the retailer's heyday from the late 1970s through 1990. Five years ago, he says he saw the writing on the wall. Digital music distribution was the wave of the future, so he came up with a plan to carve out a bit of the digital landscape for his company, Digital Music Group, Inc., or DMGI. The plan was based on his experience at Tower Records.

Mr. MITCH KOULOURIS (CEO, Digital Music Group Inc.): Tower was known for being able to go into their stores, buy a hit record of the day - whether it was Bon Jovi or Madonna, or whatever it was - as well as to go to the back of the store and maybe hit the classical section, and the jazz section, and flip through, you know, any number of Oscar Peterson records. So they really took pride in caring deep catalogue along with the hits.

As far as the digital music opportunity, it seemed clear that this was going to be the best way to be able to exploit catalogue of every kind.

CONTRERAS: Koulouris figured you could do the same in the digital world by selling less of more.

Mr. KOULOURIS: Every track in our catalogue - we have over 200,000-plus tracks in our catalogue - sells at least five or six times a month. So - on average. So when you multiply that by hundreds of thousands of tracks, the economics become, you know, pretty darn compelling pretty quickly.

CONTRERAS: Here's an example.

(Soundbite of Sugar Sugar by The Archies)

THE ARCHIES (BAND): (Singing) Honey, honey. You are my…

CONTRERAS: In 1969, Sugar Sugar was the number one hit for the animated television characters, The Archies. DMGI paid for the digital rights for the song in 2004, and it is now downloaded thousands of times per month.

Mr. RON DANTE (Lead Singer, The Archies): It feels like I've got a second life.

CONTRERAS: Ron Dante is getting royalty checks from online sales of the song, as the voice of the cartoon lead singer. Eventually, Dante left The Archies and went to work for Barry Manilow, producing all of the singer's mega hits of the 1980s. From his perspective as a successful music industry veteran, Dante says what happened with Sugar Sugar shows online sales don't need the big promotional push from record labels and radio.

Mr. DANTE: The people generate the downloads, not the big music companies. And they're not spoon-fed what to buy this week. They have their tastes, and they go after it, and they find it on the net.

CONTRERAS: DMGI's competitors broker deals with independent labels for the right to sell the label's catalogue to the downloading services. But DMGI is buying catalogues in addition to paying for the digital rights. And it seems to be working. Some of the labels DMGI own or partners with cut a wide swath through 20th century music.

Chancellor Records has historic tracks by Frankie Avalon, Fabian, and Johnny Rivers. Turtle Island Records offers aboriginal and Native American music. Compass Records specializes in Celtic music. Biograph Records has a collection of historic American genres such as early jazz, ragtime, and blues. And DMGI's recent buyout of a San Francisco-based aggregator adds contemporary artists, like Death Cab for Cutie, reggaeton superstar Daddy Yankee, and hip-hop star Ludicris.

Technology analyst Mike McGuire says DMGI has a good chance at success with labels like these, if they can continue to keep the cost down and keep their catalogue in digital circulation. But, he adds, it's not without risk.

Mr. MIKE MCGUIRE (Music Industry Analyst): It's not a dead bang, no-brainer winner, as they say. And then the gamble is that is this content that even though is niche, and there is the low-cost capability of distribution, can I find an audience for this? And more importantly, can the audience find this work?

CONTRERAS: Wall Street is watching music aggregators, or at least DMGI. Earlier this year, the company went public and generated enough revenue to make major acquisitions of even more catalogues.

Felix Contreras, NPR News.

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