The outlook for record retailers is worse than ever:

Declining CD sales, the hit from online downloads, and growing competition from the likes of Amazon.com (AMZN ), as well as discounters such as Wal-Mart and Target (TGT ) are pushing specialty music retailers to the wall. In the past 15 months alone, Best Buy has put its Musicland unit up for sale, Wherehouse Entertainment has filed for bankruptcy, and Britain's HMV has closed two of its nine U.S. stores. The continuing drumbeat of bad news has some predicting that the traditional music store will soon go the way of the eight-track player. "The [specialty music] industry is dying," says Jerry R. Goolsby, a professor of music industry studies at Loyola University New Orleans. "No one knows what to do about it."

It's not as though the music retailers didn't see this coming. In the mid-1990s, two seismic shifts shook the industry: Big discounters started pushing CDs far more aggressively, and a slew of music stores popped up on the Web. Taking aim at the latter threat, Tower, Music-land's Sam Goody unit, and others launched e-tail operations of their own. But they were no match for the likes of Amazon.com Inc., which often undercuts them on price, or for eBay (EBAY ) Inc.'s half.com site, where buyers can find new and used CDs, sometimes for a fraction of the retail price. As a result, none of the record stores has been able to use the Web to boost total revenues or compensate for falling store sales.

Nor have they done any better against the general merchandisers. Discounters such as Wal-Mart Stores (WMT ) Inc. and category killers such as Circuit City Stores (CC ) Inc. stock cut-price CDs to entice shoppers into their stores. The strategy clearly works: Today, says Goolsby, 42% of the recorded music sold in America comes from the discounters and category killers, up from some 25% in 1992.

....Stores will have to move with the times if they have any chance of survival. Later this year, for example, the London-based Virgin Megastore chain plans to test an in-store service that charges customers to download songs to portable music players. "Who knows?" says Glen Ward, CEO of Virgin Entertainment Group North America. "Maybe they'll come back and get the album." [BusinessWeek]