Summary:

Not to pile the pressure on CEO Ben Drury – but HMV’s worsening fortunes appear to suggest the increasing strategic importance of 7digital,…

Ben Drury

Not to pile the pressure on CEO Ben Drury – but HMV’s worsening fortunes appear to suggest the increasing strategic importance of 7digital, his digital music retailer and distributor which HMV bought half of from investors in 2009.

A HMV (LSE: HMV) spokesperson tells NMA: “Providing digital access to content is an important part of our transformation. Our relationship with 7digital will allow us to look at other entertainment content. There will be some announcements in the not too distant future.”

HMV on Wednesday reported 13.6 percent lower Christmas sales and a possible covenants breach. On paidContent:UK, Forrester analyst Mark Mulligan said explained: “Consumers are falling out of love with physical media products and unfortunately are not yet anywhere close to entering into whirlwind romances with premium digital products.”

In fairness, HMV CEO Simon Fox had seen the shrinkage of physical-media sales long ago – HMV has responded by stocking more gadget, game and music hardware, successfully reducing its reliance on CDs and DVDs. But, after last year’s gaming slump, not even this was enough to fend off a poor Christmas that saw its share price fall by over a fifth Thursday morning and which now looks like a thunderbolt moment for it in the migration to digital. Simon Waldman, who lauded Fox’s transformation of HMV in his book Creative Disruption, now acknowledges: “There isn’t going to be a Houdini moment here where they suddenly escape.”

If there’s no Houdini, 7digital nevertheless looks like magician’s glamourous assistant. It’s one of Britain’s best, but quietest digital media businesses, not just selling music under its own name but also facilitating music sales for partners like Spotify, Last.fm, the Songbird browser, Samsung’s Galaxy Tab and Pure internet radios.

When HMV bought half of 7digital in September 2009, CEO Drury told me: “I asked Simon Fox: ‘What’s HMV doing in digital? You’ve made several attempts and not really succeeded, you’re the biggest entertainment retailer in the UK’. Digital for them was a bit of a sore point.”

HMV has since made 7digital its facilitator for HMV.com music and Waterstones e-book downloads, and the company will now likely also start handling other content types for its parent. HMV proffered £300,000 worth in services from 7digital in the last financial year. But, seven months after the part-acquisition, HMV also scored a £600,000 share of 7digital’s losses.

Last summer, HMV confusingly separated its online retail sites for physical and digital content, with the latter site, HMVDigital.com, run by 7digital as what could now become an increasingly important touchpoint.

HMV could try to use its brand as a provider in the growing subscription online music space, though Spotify occupies a big slice of this, 7digital is a per-track retailer and Drury said in 2009: “The jury is still out on whether subscription can reach mass-market.”

If a big transition from physical to digital is the order of the day, HMV itself seems unconvinced and hamstrung. In June, Fox told investors: “Opportunities to create real value in digital are scarce for all involved, not least because of widespread competition from the free illegal market.

“Our environment remains highly competitive, with some retail and online competitors prepared to offer many of the same products to their customers at loss-leading prices.”

So HMV finds itself citing upcoming digital plans as a way out physical troubles – it has a great digital partner with which to do so, but it appears to think the digital opportunity is considerably smaller than the world of LPs and CDs from which it is emerging. Fox called 7digital a “long-term” investment, but it could now be called on to bring digital success sooner rather than later.

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