ASSOCIATED PRESS Customers looked over bins of VHS tapes and DVDs on sale at a Tower Records store in San Francisco last month. After $167 million in losses over four years, Tower is just trying to keep its brand alive.

Tower Records
struggles to stand

The venerable music icon just hopes
to make enough to pay interest
on its $200 million debt

---

By Jim Wasserman
Associated Press

WEST SACRAMENTO, Calif. >> Tower Records, the storied 1960s music chain that launched the music megastore and became a cultural retailing icon, strolls into its 43rd holiday shopping season this weekend struggling with debt and on the ropes.

The West Sacramento, Calif.-based Tower hopes four weeks of strong sales will reverse a new image as the tottering giant inside a stumbling music industry. Among the chain's troubles: deep-discounting rivals, changing consumer habits, lack of hits and its own missteps in the 1990s as the music business began a dramatic shift.

Tower exemplifies the even deeper woes in a recording industry beset by piracy, computer CD "burners" and fans who download from the Internet rather than buy from stores.

As 2002's countdown to Christmas begins, the family-held chain of 113 stores in 21 states -- known for steep prices, deep selection and superstore band appearances -- is in the hands of a corporate restructurer.

The company that grew up on rock 'n' roll and matured into a hip center of world music recently cut 90 jobs and sold 51 profitable stores in Japan. More closings are imminent. Tower has also overhauled management, begun experimenting with new non-music merchandise -- and has reported its first sales gain over last year: up 2 percent the first two weeks of November.

As part of its restructuring, the company has even begun reviewing its CD prices, which often prompt mainstream record buyers to scoff and buy elsewhere.

"Where Tower prices, where they've historically priced, to be perfectly honest, is not competitive," argues one New York investment analyst, Colin McGranahan of Sanford Bernstein.

Tower's typical CD can cost up to $18.99, compared with $13.99 or $14.99 at Best Buy, Wal-Mart and Amazon.com.

But the chain has a loyal base of older, more affluent customers who spend heavily on music and appreciate its wide selection. "It seems to me," says Lee Landenberger, 46, of Atlanta, an ex-radio DJ who spends $2,000 a year on music and liberally burns CDs for friends, "their rationale all along has been, 'We charge a lot and always have, but we have such a huge catalogue of stuff that's going to bring you in."'

After $167 million in losses over four years, Tower aims mainly now to keep its brand alive, regroup and rebuild. And in the season when record retailers typically rack up 30 percent of their annual sales, Tower's managers see a chance for new life.

Under the eyes of watchful creditors, they're fast remaking Tower into a "full entertainment" store.

"We're looking for things that can move the needle quickly," says Betsy Burton, 50, a corporate turnaround specialist hired Sept. 18. Alongside Tower's mix of Eminem and Pavarotti, Burton is blending "fun things for the holidays, unique toys and collectibles, pop culture and offbeat things." She's pushing gift cards and E-gift cards, while moving in DVD videos, small electronics and more video games, which are seeing double-digit sales growth again this year.

A similar 1980s Burton strategy -- adding major brand beauty products to Supercuts stores -- turned around that ailing chain.

"You can generate some momentum, and everything feeds on itself with new energy in the store," she says. "It's important to do some things, and do successes early on."

Music purists may sigh, but Burton says it's the path to the corporation's one true goal at the moment: to reach the end of 2003 earning more money than the interest payments on its $200 million debt.

Tower's troubles started in 1998 when it borrowed $110 million to fuel an expansion drive in Asia, South America, Canada and Great Britain. In 1997, Tower's founder, Russ Solomon, now 77, boasted in a magazine interview that his company "can compete with anybody." Solomon also predicted an industry shakedown where companies would die and "the good ones will get bigger."

Not long after, Tower began its four-year streak of losses in a market turned upside down by free music downloads on Napster and successors such as KaZaa.

Today, music fans like Eric Chu, 17, are increasingly turned off by CD prices. Though record industry officials call CDs a bargain compared to other entertainment options, Chu browses at Tower for hip hop, rap and rock music, then downloads at home.

"I would like to support the music industry," says the San Francisco high school senior. "But I'm young and I don't have much money."

Investment analysts consider comments like that when they look at Tower's restructuring strategy and competitive struggle and view retail stores as long-run losers in the paradigm shift to cyberspace.

Indeed, New York-based Nielsen SoundScan, which tracks music shipments, reports the recording industry shipped 22.3 million fewer CDs, cassette tapes and albums in 2001 than 2000. The Recording Industry Association of America reports CD shipments fell 7 percent in the first half of 2002, after falling 5 percent last year.

Meanwhile, RIAA cites estimates that music fans illegally download more than 2.6 billion music files a month on the Internet.

"The terrestrial retailers of music have seen their best day," says Phil Leigh, digital music analyst with Raymond James Associates in St. Petersburg, Fla. "What Napster did during its season in the sun was demonstrate beyond the shadow of a doubt that the consumer is ready for music to be distributed over the Internet."

Bernstein's McGranahan agrees. Tower has done a "decent job" digging out of its problems, he says, but "regardless of what works, it's not going to be selling packaged material in stores."

But RIAA chairwoman Hilary Rosen says, "I'm not that pessimistic. I think that shopping is a social experience and learning about new music is a social experience, and you don't get that on KaZaa.

"I believe retailers have to re-energize music stores as social destinations," she says, and Tower "set the bar for the in-store experience" where people wander aisles "checking stuff out."

Burton, agreeing that a big shift to digital distribution is under way, notes that Tower's Internet site now offers paid downloads from the Universal Music Group catalogue. But she says people will always enjoy the ambiance of big music stores and seeing bands perform.

"It's a place to go, to find fellow enthusiasts and discover new music," Burton says. "That will always have a place."

This Christmas, 3,400 Tower employees are banking on it.