A digital music store that sells more than MP3s

So far, most online music retailers have come from the world of technology. But one of the next companies to take on Apple's iTunes store has roots in the mall.

Hot Topic, a chain of stores that sells clothing and accessories inspired by music and pop culture, plans to start a digital music store called ShockHound. By the time it is introduced in August, ShockHound will have permission to sell MP3s from at least three of the four major labels, the company says, as well as hundreds of independent labels.

Hot Topic is starting ShockHound with a very different strategy from its competitors. Like most online stores, it plans to sell songs for 99 cents and albums for $9.99, prices at which profit margins are low. But just as Apple uses the iTunes store to drive sales of high-margin iPods, ShockHound is trying to use MP3s to help sell the kind of profitable band T-shirts and accessories it carries in stores.

"For us, music merchandise is where the profit is," said Hot Topic's president, Jerry Cook. "The reason we carry CDs in the stores is that to be in a music-centered business and not have music would be a contradiction. And you can't be an online music store and not have MP3s."

Unlike Hot Topic's stores, which favor CDs and clothing from bands identified with its suburban goth aesthetic, ShockHound will sell music and merchandise from a wide array of acts in every genre. It expects to sell T-shirts from more than 1,000 bands, as well as a wide selection of other kinds of clothing, accessories and vinyl records.

"The idea of doing this is that there's an opportunity to get into a business that's bigger than alt-rock," Cook said.

Though Hot Topic thrived in the earlier part of the decade, in the last two years, its stock has dropped from just under $15 a share to $5.43 on Friday.

Right now, Hot Topic's stores account for a very small percentage of CD sales, according to Russ Crupnick, a senior analyst at the NPD Group. But the chain, which has more than 600 stores, has been something of a tastemaker in alternative rock, championing bands like Paramore and Boys Like Girls, which tend to sell a lot of merchandise relative to their popularity.

Hot Topic's expertise in marketing emerging bands could help some independent labels, according to Prashant Bahadur, director of retail marketing at the Orchard, a company that helps small indie labels sell their songs online.

While most labels do not make money on their bands' merchandise sales, others have some artists signed to "360 deals" that give them a share of almost all of an artist's revenue.

"I think the most interesting thing on the label side is being able to combine the merchandise with the music," said John Janick, the founder of Fueled by Ramen, an independent label affiliated with Atlantic Records. "I think Hot Topic is reinventing themselves as the one-stop shop for artists."

Fueled by Ramen has run successful promotions at Hot Topic stores where buyers of a band's T-shirt receive a free digital song. ShockHound could use those kinds of deals to compete with iTunes.

"A lot of their demographic probably has MP3 players, but it's possible they've already established relationships with existing online retailers like Apple or Amazon," said Mike McGuire, a vice president at Gartner Research. "They're going to have to convince their customers that their online store is more compelling than all the others."

To that end, ShockHound will publish articles and video content put together by an editorial staff led by Randy Bookasta, the former editor in chief of the alternative music magazine Ray Gun. It will also offer some basic elements of online social networks, including a feature that lets potential customers see the products other users have bought, as well as how much they liked them.

"If you're just looking to get an MP3 for your iPod, there are other ways to do that," said John Kirkpatrick, a senior vice president of Hot Topic who serves as the company's chief music officer. "But there's a void out there for real music lovers. When I was a kid discovering music I would walk into record stores and there would be giant pictures of artists, and they would be selling shirts and posters. ShockHound is offering an online version of that."

Entire contents, Copyright © 2008 The New York Times. All rights reserved.

[Renegade Knight]

Low profit margin? Digital Duplicates for Free. The Cost of production is virtually zero. The only reason profit margins could possibly be low is if overhead is so high that a record company has to charge 98 cents a song to cover it. Of course if they sold 4 times the songs at half the price that would change and profitiability would increase dramaticly.