LINDA WERTHEIMER, host:
Today's business news focuses on a development in the indie music market.
In the music industry, discount retailers like Walmart and Best Buy have been blamed for squeezing independent record stores and even some mid-sized chains. These stores just can't compete with the prices offered by the big buck stores. The problem with big retailers is they don't carry the little labels offered by smaller shops. Now, the nation's largest consumer electronics retailer, Best Buy, is wading into the indie music market by partnering with online distributor CDBaby.com.
Minnesota Public Radio's Annie Baxter reports.
ANNIE BAXTER reporting: (Journalist, Minnesota Public Radio)
In a lot of ways, CD Baby is to musicians what online publishing has been to writers. It allows musicians to get their work distributed nationally, at little cost.
That was the allure for Minneapolis based music producer Mark Wade. He runs a small label focused on releasing CD's by his 17-year-old son, who goes by the name AD, short for American Dream.
(Soundbite of artist America Dream singing)
BAXTER: Earlier this year, Wade started selling his son's music at CD Baby.
Mr. MARK WADE (Minneapolis music producer): CD Baby was something that a lot of musicians had always told me about. We thought it would be easier to sell products online with CD Baby as opposed to what we would probably do if we were able to package it up and put it out there ourselves.
(Soundbite of artist America Dream singing)
BAXTER: Artists pay a flat fee of $35.00 to get CD Baby to set up a page for them on its website. Artists send a few of their recordings, which CD Baby keeps in a warehouse. And when a customer orders a disc, CD Baby's staff takes care of all the billing and shipping.
Artists decide themselves how much to charge per recording, and CD Baby gets $4.00 from every sale. Mark Wade says he's only sold a handful of his son's CD's through the website so far, but he believes it's still worth it. According to CD Baby's figures, the site attracts 100,000 visitors a day and has sold nearly two million discs.
Do you ever buy stuff off the CD Baby for yourself?
Mr. KELLY EAGEN(ph) (Director of Business Development, Best Buy Corporate Entertainment Division): Yeah, all the time.
BAXTER: Kelly Eagen is Director of Business Development in Best Buy's Corporate Entertainment Division, just outside Minneapolis. He's one of the people behind the retailer's new partnership with CD Baby, a deal launched with little fanfare in November.
Eagen says the idea for the partnership derived from research he did at stores in Best Buy's chain. He says he found that employees were frequently referring customers to local record shops, because the clients were asking about indie music CD's Best Buy doesn't carry.
Mr. EAGEN: Being a large music retailer, many of those titles that are smaller we can't get because of distribution on the artist, and, so as a result, I observed a demand, or our customers wanting to have more independent artists.
BAXTER: Eagen says it was a no-brainer to turn to CD Baby to get access to those indie titles. The online retailer is among the oldest of its kind, and its founder, Derek Sivers, has a lot of credibility in the indie community for his honesty and integrity.
Sivers is quick to point out that the deal with Best Buy won't affect how much musicians get from the sale of their CD's. Best Buy's but comes out of CD Baby's own $4.00 commission on each sale. But Sivers says he's aware that some indie music artists might question why he would partner with a company that's been accused of helping to put independent music stores out of business.
Mr. DEREK SIVERS (Founder of CD-Baby-dot-com): Best Buy is the boogeyman until all of a sudden they're selling your music, and they love your music and want to sell it and then, Hey, they're not so bad.
BAXTER: Sivers insists CD Baby won't change to appeal to a wider audience just because it's hooked up to Best Buy. He hopes the partnership will advance his goal of promoting lesser-known artists, but he says he's not being overly optimistic.
Mr. SIVERS: I don't think it's going to be a big, huge difference. I don't think this is going to, you know, quadruple our sales or anything like that.
BAXTER: If expectations are low for moving a lot of merchandise, that begs the question of how much the deal will benefit Best Buy. CD's don't generate huge profits to begin with. Only 16% of the company's revenue comes from entertainment software like CD's. According to Best Buy's last earnings statement, that means CD's are loss leaders. They're not big money makers themselves, but they draw people into the store; sometimes long enough to fall in love with an expensive plasma TV, which is how Best Buy makes most of its money.
According to Aram Sinnreich, a music industry analyst with Radar Research in Los Angeles, the loss leader phenomenon means big retailers like Best Buy have to calculate very carefully what they're going to sell in their stores, because every square foot affects profit margins. Sinnreich says, with respect to CD's that often means appealing to the lowest common denominator of taste.
Sinnreich says Best Buy's partnership with CD Baby shakes up that formula.
Mr. ARAM SINNREICH (Music industry analyst with Radar Research): When you're dealing with the internet, the aisles and the shelves are essentially infinite. And the way that you develop profit is through building a long-term relationship with your client base and making sure that they come back again and again; and making sure that your brand is foremost in their minds, whatever they need. And the way to do that is by infinitely expanding the amount of music and the variety of products that you sell.
BAXTER: Sinnreich says while most music sales are still tendered in brick and mortar stores, it's smart for Best Buy to go after the online business. And the company's deal with CD Baby isn't its first venture online. Best Buy sells gift certificates for the digital download website iTunes. And since 2003, the retailer has been offering access to the digital music subscription services Rhapsody and Napster through interaction kiosks in its stores.
The partnership with CD Baby might eventually follow that model, but for now it's exclusively an online relationship. A banner on Best Buy's site links to CD Baby. Minneapolis music producer Mark Wade is skeptical about the Best Buy deal. He doubts it'll generate much interest in the American Dream recordings he's posting on CD Baby.
Mr. WADE: In my understanding, most people that are finding independent artists, they know about CD Baby and they don't need to go to Best Buy to find that out. And most people that go to Best Buy are looking for what's the latest artist that they're trying to search for. So I don't see it as being a big deal to me.
BAXTER: Wade says if CD Baby discs were featured in Best Buy stores he'd feel more hopeful about the arrangement. But for now, if you're looking for the American Dream, you'll have to go online.
For NPR News, I'm Annie Baxter, in Saint Paul.
(Soundbite of artist American Dreaming singing)
WERTHEIMER: And this is MORNING EDITION for NPR News. I'm Linda Wertheimer.
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