Column 123: Digital Divide
Homer's hunkers down as downloads grow.

They've been talking about the end of the CD for years now, since a certain portable device reared its sleek, white plastic head in 2001. The advent of the iPod, iTunes and digital music files was viewed by some as the eventual end of the line for record stores. Kinda like how the CD was suppose to kill the record album, but that's another story.

So now it's 2007, and my local Homer's is still open down on Saddle Creek Rd., looking busier than ever as I drive by on a Saturday afternoon while my sleek white plastic friend that's hidden in my Mini's glove box feeds Neil Young's Live at the Fillmore East to my car stereo.

Both formats -- old fashioned CDs and newfangled digital downloads -- can and do exist in harmony. At least for now. Downloads are catching up. Case in point -- the first week sales of Bright Eyes' latest album, Cassadaga. As has been reported countless times, the album logged in at No. 4 on the Billboard charts with first-week sales at just slightly north of 58,000. What hasn't been discussed is that 11,000 of those sales were digital downloads -- around 19 percent. That's a bigger percentage of downloads vs. CD sales than Modest Mouse or The Arcade Fire had with their recent releases.

And that's good news for Saddle Creek Records. Creek executive Jason Kulbel said the label has done what it could to encourage iTunes downloads. "Encourage probably isn't the right word," Kulbel said. "The things we did with iTunes are more of a necessity these days. We gave them an exclusive pre-order track. If you don't give them an exclusive item, you don't get the best site placements (banners, features, etc.). The better feature placement you have on there, the better you do."

Ironically, Cassadaga boasts ultra-cool Grammy-worthy packaging, with artwork that's only decipherable using a special decoder window included inside the CD sleeve -- something that's completely lost on those 11,000 who downloaded the album from iTunes, Napster or elsewhere. Kulbel said the intricate (and expensive) packaging wasn't a mad stab at luring people to buy the "hard version" of the album. In fact, the label makes more money selling downloads than CDs. "(There's) no manufacturing cost on iTunes, so you come out ahead on digital sales," he said.

"It's been apparent for awhile now that you certainly cannot ignore digital music," Kulbel added. "…in the last couple years, we've thought a lot about digital sales and how they relate to the future of music. It's one piece of what could ultimately kill record stores -- part of the problem, we'll say."

Sounds dire, especially for independently owned record shops. But Mike Fratt, president of Homer's, isn't exactly shaking in his boots. He talked about the issue a couple weeks ago while attending the annual convention of the Coalition of Independent Music Stores (CIMS) in LA, where a half a day was devoted to the topic. Fratt says no one knows for sure what role digital sales will play in the future, or how it will impact independent music stores. That said, The New York Times reported last month that digital sales jumped 53 percent in the first quarter of '07 vs. the same period in '06, while CD sales slumped 17 percent. Part of the drop was due to the lack of big-name releases in the first quarter.

The good news: "Digital isn't growing at a pace that's in line with the decline of hard sales," Fratt said. "Digital sales are still a blip. Physical goods are 85 percent of the music market."

Still, independent music stores are looking for a place to play in the growing digital music game. Fratt says indie retailers are working with individual bands to offer exclusive downloadable content tied to online storefronts like homersmusic.com. "The structure of record labels is beginning to disintegrate," Fratt said. "We're now dealing directly with the artists."

It's impossible for stores to make money from digital downloads, he said. "We're doing it because we feel like we have to. We're not going to throw a bunch of money down a rabbit hole by desperately looking for a digital solution."

The real answer is for the wholesale cost of CDs to drop to $7.50. "The physical business would reignite if people could find everything they wanted at $10," Fratt said. "We don't think physical sales will ever go away. The question is where will it level off? 50/50? 60/40?"

Perhaps the only golden lining to the relentless drop in physical sales is how it's driving some of the big chain stores out of business. "We need to just hunker down and maintain ourselves for a couple years," Fratt said. "So many people will exit the market that it will open opportunities for indie stores. There are new ones opening right now, while Tower and Virgin are closing."