Wherehouse Files Chapter 11

The San Diego Union Tribune ^ | 1/22/03 | Frank Green

[South40]

Company closing 150 sites as online piracy eats into sales of CDs

By Frank Green UNION-TRIBUNE STAFF WRITER

January 22, 2003

Wherehouse Entertainment, hammered by declining CD sales due to rampant Internet piracy, yesterday filed for bankruptcy protection and said it is in the process of closing 150 stores – 37 percent of the chain's outlets.

The Torrance-based company said it will announce within the next two months if the doomed locations include any of its 17 San Diego County stores.

Meanwhile, a federal judge ruled yesterday that Internet providers must honor requests by the music industry to reveal the identities of computer users who illegally download music, an action that could step up the prosecution of online pirates.

But will that be enough to keep the music playing at troubled brick-and-mortar chains such as Tower Records and Best Buy's Sam Goody division, which recently announced 90 store closings?

Jerry Comstock, Wherehouse's president and chief executive, said the company has also been hurt by discount retailers such as Target and Wal-Mart, which increasingly are selling prerecorded music as loss leaders at below cost.

"The retail music environment has changed dramatically in the last three years, and through the Chapter 11 process, we believe Wherehouse will be able to restructure its operations and exit underperforming stores," Comstock said.

Wherehouse plans to focus much of its resources on a makeover campaign at its 250 remaining stores that will include high-tech, interactive features such as music kiosks. The company said those stores will continue to operate as normal.

Anita-Marie Hill, a company spokeswoman, said some stores targeted for closing might be saved if lease agreements can be renegotiated with landlords.

Closely held Wherehouse previously filed for Chapter 11 in 1995 and emerged in 1998, when it also bought Blockbuster Music stores.

Analysts said yesterday that Wherehouse's massive retail contraction hardly comes as a surprise because many young audiophiles are increasingly downloading music files from the Internet or burning copies of friends' compact-disc collections.

"I think we'll see more" retail music stores being closed in coming months, said Phil Leigh, an analyst who covers the music industry for Raymond James.

Leigh said the music industry is slowly moving away from the CD format to Internet subscription services for distributing music.

Wherehouse's bankruptcy filing follows a weak holiday selling season for the recorded-music industry, which saw U.S. CD sales overall fall by nearly 9 percent in 2002.

Record-store operators such as Trans World Entertainment Corp., Tower Records and HMV Stores Inc. are increasingly diversifying, selling gadgets, trinkets, DVDs and video games to offset declining CD sales.

HMV, which operates nine stores in the United States, recently closed its giant Times Square site in New York.

During the late 1990s, the world's five major record labels – BMG, EMI Group Plc, Universal Music Group, Sony Music and Warner Music – helped retailers by subsidizing advertising costs for chains that agreed to price albums via company guidelines. But the practice was deemed anti-competitive in 2000 and was halted by federal regulators.

Several state attorneys general also sued major labels and music retailers over the practice, which prosecutors said illegally inflated the price of CDs.

In late 2002, five major record companies and three retailers agreed to a $143 million settlement, although few consumers have claimed the settlement money, according to news reports.

[South40]

These lost jobs will no doubt be blamed on George W. Bush and the tax cut.

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[IncPen]

Barbara Streisand.

Jerry Comstock, Wherehouse's president and chief executive, said the company has also been hurt by discount retailers such as Target and Wal-Mart, which increasingly are selling prerecorded music as loss leaders at below cost.

Blaming it on file swapping is a red herring.

Why not blame it on a poor business model? Lousy cost controls? Poor accounting?

To pick out one politically-charged cause and assign it as such is irresponsible.

[avg_freeper]

Most Wherehouse CD's are marked up to more than 50% of what you would find anywhere else. And most places that have Wherehouse's with used CDs have other local used CD shops with much better prices.

[dtel]

To pick out one politically-charged cause and assign it as such is irresponsible.

Such is the state of affairs today.
Sensationalism sells, get used to it.
We are going to get an entree' sized helping to go along with all the appetizers we/ve had the last twenty years.

[Avid Coug]

I find it ironic that the major music labels who were tagged for illegal price fixing are seeking the sympathy of consumers and the courts for the natural results of their illegal activities--music file sharing. If they would drop the retail price of CD's to below $10, and offer online downloads of single tracks at 50 cents a copy, they would make as much money as they ever have. But they'd rather use the courts to fight their own customers, and continue forcing ridiculous retail prices on the retailers. Arrogance and greed.

[South40]

On the subject of selling used CD’s:

I saw an interview with Garth Brooks years ago wherein he was telling of his pleading to his record label to stop selling to Wherehouse because it was selling used CD’s...CD's that may or may not be worth the reduced price.

He actually said he crawled on his hands and knees and begged.

I’m a country music fan and own several Brook’s CD’s, but I lost all respect for the man that day.

He’s so obviously wealthy that he could never spend all the money he’s made yet he gets so indignant on the subject of the selling of used CD’s.

Wherehouse is a business who is in business to make money.

If they want to sell used CD’s that’s their prerogative.

It’s called capitalism Garth.

Get over it.

[ken5050]

When I first read your headline I thought it said "Whorehouse files for bankruptcy..." no doubt because of the quirky spelling "w-h-e-r-e"...and I thought, boy, the economy must really be in the tank if a whorehouse folds.....

[hopespringseternal]

That's funny. I have always referred to them as "Whorehouse Music" because it just seems to jump out at you.

[templar]

I don't suppose they ever did a quick study to determine who their competition was and what their prices were? Gotta compete if you're going to stay in business.

[Moonman62]

I wonder what excuse the buggy whip industry used when they were in their final decline?

[1stFreedom]

I don't see a direct connection with downloading and slow CD sales.

Decades ago, software was copy protected. It was always a race to defeat the latest copy protection. Many companies went out of business.

However, I don't think game copying was the issue. If it was, companies like Electronic Arts wouldn't still be around.

I think that bad business planning and a market glut killed the companies. Most people I knew who pirated software would never have purchased it. (That doesn't justify piracy though).

Later on, copy protection was not included in much of the PC software. Yet these many of these software companies thrived. Games were copied left and right, but the companies sold enough products to stay in business.

Now, copy protection is coming back, but I don't think it will significantly add to corporate profits.

My own thinking on the issues is the that the economy is largely responsible. Kids are the primary purchasers of music. Parents are tighter with the money they give to kids. More teenagers are unemployed, and therefore, have less money to spend on music.