Retailers Buy Stake in E-Music Venture

Six top retailers are developing their own digital music service, hoping to attract masses of fans that have yet to embrace legitimate music offerings on the Internet.

The six -- Best Buy Co., MTS Inc.’s Tower Records, Trans World Entertainment Corp., Wherehouse Entertainment Inc., Virgin Entertainment Group and Hastings Entertainment Inc. -- have acquired a controlling stake in Los Angeles-based Echo Networks Inc., which tried in vain to build its own subscription service around customized Internet radio stations.

The companies, which are expected to announce the revived Echo venture today, didn’t disclose how much money they’ve invested in the consortium.

The group faces the same challenge as other fledgling digital services: It has to compete with wildly popular file-sharing systems that let consumers copy songs from one another’s computers for free. Three of the most popular file-sharing systems are under legal attack from the labels and Hollywood studios, but a new study by Websense Inc. found more than 130 similar systems around the globe.

The exact nature of the services that Echo will provide will be up to each of the retailers, which will have competing digital offerings, said Dan Hart, Echo’s chief executive. Two advantages the retailers have over the music services already on the market, Hart said, are their ability to bundle digital music files with CDs and their ability to tailor their offerings to their customers’ buying habits.

Kevin Ertell, senior vice president of Tower Records’ online operations, said retailers also can deliver digital files directly to shoppers’ portable music players in stores, taking advantage of faster Internet connections than consumers have at home.

The consortium could spell trouble for the middlemen that supply digital files to retailers, including Ecast Inc. and Liquid Audio, whose digital-music-delivery assets were acquired Friday by Geneva Media for $3.2 million.

Yet the retailers may not completely cut out the middlemen. Minneapolis-based Best Buy is trying out a music-download service in conjunction with Ecast. Scott Young, Best Buy’s vice president of digital entertainment, stressed that the Echo venture was just one of the options his company is exploring.

Besides, Echo still has to obtain a complete set of licenses from the record labels before it can offer a competitive service. But Hart said the retailers’ involvement in Echo should help it win favorable terms from the labels, given that the retailers, like the labels, don’t want to undermine CD sales.