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Blockbuster, IBM eye electronic inventories

Blockbuster Entertainment Corp. and IBM are forming two companies aimed at delivering music, films and games electronically to retailers. If it succeeds, the partnership could dramatically change the economics of music and video retailing.

The world’s biggest music and video retailer and International Business Machines, through its subsidiary Fireworks Partners, will announce today that they are creating Fairway Technology Associates to develop the computer hardware , software and communications network.

Using Fairway’s technology, the music would be digitized into computer language, compressed and sent via high-speed phone lines to a massive computer storage center, or server.

The server could be located at a large record store, like a Blockbuster Virgin outlet, or dispense music to a number of stores in a region.

According to the companies, the partnership could dramatically change the economics of music entertainment distribution. Fairway’s technology would let record stores eliminate much of their inventories, replacing them with just-in-time delivery of music in whatever format needed, from CDs to tapes.

“That’s the ideal situation,” said David Lundeen, a VP for Blockbuster Technologies Inc. “There’s an opportunity to supplement your existing inventory.”

IBM subsid Fireworks also is investing in Blockbuster’s NewLeaf Entertainment Corp., which will work with the record companies to license the music and market the system to retailers.

NewLeaf, formerly known as Soundsational, has worked with IBM for more than a year on this project (Daily Variety, Feb. 18). Both companies are based in Deerfield Beach, Fla.

Accelerated turnover

Most record stores turn over inventories 2 1/2 times a year. By comparison, Fairway could mean turning it 200 to 300 times a year, Lundeen said. That would translate into tremendous savings because of the cost of keeping unsold records in a warehouse.

Moreover, a thousand copies of the hottest title could be ready overnight. Another boon is giving tremendous choice to consumers.

A store typically carries around 12,000 titles; electronically, the 100,000 titles currently published would be available.

The music industry isn’t the only target for the technology.

“Any content — audio, video, software games — would be brought to a regional location,” said Robert Carberry, president of Fireworks. “Once compressed and put over a network to retail outlets, various forms of media could be written,” including CDs, tapes and game cartridges.

The cost to the retailer would be comparable to that of maintaining a store’s inventory. NewLeaf is expected to start marketing it within a year.

First, Fairway and NewLeaf have to convince record labels, which are also major distributors, to go along by licensing their music for NewLeaf to reproduce.

Blockbuster reportedly has been in conversation with Sony Music and Polygram. Record executives were not available for comment.

Retail reluctance

Record retailers also will have to come aboard.

“We’re not aware of it,” said Stan Gorman, a senior VP at Tower Records, the second largest buyer of prerecorded CDs. “There are six major distribution companies, with major workforces. I’m very skeptical. Sure, it sounds great, but we were supposed to have a man on Mars.”

The labels, however, may be more receptive since they carry much of the inventory and deal with returns. “They have to buy into this after it’s clear it will be secure and they’ll be paid for it,” said David Baron of computer newsletter Digital Media.

Some mundane questions remain unanswered. While the music may be delivered electronically to digital warehouses, packaging it into CD jewel cases or cassette containers with unique artwork will be problematic for retailers.

And just how will the record companies be reimbursed for sales — a potential bookkeeping nightmare?