Sunday 20 January 2013

When the Music Stops: The Past, Present, and Future, of HMV

There are a two big myths circulating about HMV, the last-music-retailer standing on the British high street, which recently went into administration. Myth #1: HMV was killed by iTunes and downloaded music. Myth #2: HMV is, indeed, dead.

      1. HMV was killed by iTunes and downloaded music
This is a convincing narrative being propagated in much of the business press, but I don’t buy into it. There was, is, and will continue to be a market for hard-copy CDs and DVDs. Many people have not switched to downloading music, preferring the tangible feel of a disc in their hands.

No, from the product side, HMV’s competition comes from on the one hand, and from the supermarkets on the other. When it comes to buying the mass market, top charting movie release or pop record, it is simply easier to bung it in the trolley at Tescos instead of make a special trip to HMV. When it comes to buying niche, specialized albums and movies it was a safer bet that you would find it on Amazon. HMV has neither convenience nor range: it is stuck between a rock and a hard place.

      2. HMV is, indeed, dead
Reports of HMV's demise have been greatly exaggerated. As I write this, HMV has gone into administration, which means that it will be run as a going concern until a buyer can be found. Only if this proves impossible will it be wound down.

Most media commentators seem to miss the crucial point that on a going-concern basis HMV has still been reasonably profitable. It has been caught out because for years it relied on rising sales to support its working capital base. As I pointed out in this blog two years ago, its sales growth had halted, and it has been caught in a working capital trap. The administration process will wipe out its equity holders, allow a restructuring of debts and closure of unprofitable stores, but then the remaining assets should be able to continue running as a viable business.

One big risk factor here is the inexplicable decision of administrators to stop accepting HMV gift cards at the stores that remain open. This will have caused HMV’s credibility and brand value to plummet. In theory, as the last remaining record store on the high street it should have a reliable stream of customers. But the messy handling of the administration has caused much of its remaining value to evaporate. I would not be surprised if its future sale was accompanied by a complete re-branding to distance the firm from the current disarray.

Update (21st Jan): Administrators have announced that HMV will accept gift cards. An eminently sensible decision, although much reputational damage has already been done.