The Internet, Deflation and the End of Music Stores

by: The Stalwart

The Stalwart submits: Allow me to interject my own personal tastes here -- I never liked music stores.

Other than a certain joy I got, as a young record collector, from sitting on my knees, picking through piles of $1 vinyl LPs, looking for rockabilly and surf-guitar records, I've always found the physical CD store to be obnoxious. Unlike a book store, where browsing and skimming is always a pleasure, you can't often listen to the music you're about to buy, which make "browsing" for music something of a joke. Needless to say, the emergence of online music stores was a welcome event by me.

Naturally it hasn't been welcome to the physical music retailers like HMV whose CEO was fired this week on weak sales, which were blamed on online competition. Also Musicland, which owns Sam Goody, filed for bankruptcy this week. Sam Goody, if I recall, would charge up to $18 for an album at one of their mall-based outlets. Good riddance.

And while today it's music stores, many kinds of mall stores are plainly threatened by the Internet as well, which doesn't bode to well for malls. At a minimum, losing stores like Goody, or Tower Records, or DVD stores will impact the mall's pricing power in terms of rent. It may not be apparent yet, but I don't see how the Internet won't be a strong deflationary force in terms of land.

The Internet should have a deflationary effect, eventually, on NYC land prices. The more technology changes the financial industry, as more work can be done in places like India and Omaha, the fewer $500,000 Christmas bonuses awarded to NYC bankers, the less condo-owners can charge for their digs come January. No, it hasn't happened yet, but it likely will. It's also hard to see how, over the long term, the Internet won't have an effect on other commodities like paper and energy. It doesn't seem likely now, with industrial commodities at all time highs, but I can't think of a compelling alternative argument.

Now here's a brief anecdote to show how things can get turned completely on their head. Back in 2000, I had a friend who worked at ActivePower (NASDAQ:ACPW) a maker of uninterruptable power supply (NYSE:UPS) systems. The company had high orders from Internet companies, looking to supply their server farms. But it wasn't the uninterruptable part that they were so interested in. ActivePower's products were smaller than other systems, and that meant more space for servers within a building, and at the rate that server demand was increasing there was an incredibly high premium for anything that could save them space. It should have been obvious to me, from that story, that a bust was right around the corner.

It may be pie-in-the-sky optimism, but it doesn't seem like we've witnessed the true productivity gains from the Internet. While there is a benefit from technology, obviously, to business, the true economic gains come when land and other commodities can truly be reduced or substituted for something cheaper. Hollowing out the malls, getting rid of $18/album CD stores, is a good start.