Archie Norman gets in on the digital music act

So, if the pundits are right, Tesco will shortly announce, alongside its annual results, that it intends to spin-off its e-commerce arm, Tesco Direct. Given the valuation precedent set by Dixons’ demerger of Freeserve, the expectation has to be that Tesco’s move would herald a stock market flotation for Tesco Direct.

Assuming the dot-com bubble has not burst by the time it floats, but only deflated somewhat, then the business could be worth as much as one-third of Tesco’s current &£14bn market capitalisation. It would give Tesco Direct a full valuation at a time when traditional UK retail shares have suffered, as well as access to capital investment to keep Tesco ahead in the Internet shopping markets. That, it could be argued, should provide sufficient motive for such a move.

But it is also interesting to see how seriously Tesco is taking the Internet. Where Tesco goes, other retail chains will follow. And in one particular retail sector – music – there is a tide which, taken at its flood, will lead on to fortune, as Shakespeare’s ‘Julius Ceasar’ would have it.

But in this context Archie Norman is not Brutus, rather he is one of the spear-carriers ready to rise up and take advantage of the changing times. In February, I noted in this column that his apparent abandonment of the business scene in favour of the shadow front bench was a loss that an ailing retail sector could ill-afford. I also said that the Knutsford venture, in which Norman had teamed up with three other entrepreneurs to bid for retail lame ducks, had turned out to be something that couldn’t fly itself.

Whatever the validity of that last observation, the latest commercial re-emergence of Norman would seem to contradict the view that he is on a one-way voyage with the crew of William Hague’s Titanic. Norman emerged at the weekend as a director of and investor in Mode International, which is described as an application service provider to music companies, rights owners, distributors and retailers involved in the online distribution of music.

Mode is an acroynm for Music On Demand, which is what this enterprise was previously named, and is chaired by my friend John Preston, who was previously chairman of music conglomerate BMG and takes much of the blame for bringing us acts ranging from The Eurythmics to Take That. My point is that he goes back a bit in this industry, which gives some weight to Mode managing director Iain Clark’s claim that he’s not jumping in with a quick and dirty” solution to commercial digital music distribution.

Now combine that music-industry weight with Norman’s retail nous and I would contend that you have a sector overhaul in the offing. In a revision of my February view of Norman, therefore, I have to suggest that it’s not so much a case of Norman moving from retail to politics, as of a retail market moving its distributive base and Norman following it.

Norman is displaying catholic tastes in his choice of work colleagues these days. I’m not so much thinking of Preston, who is reasonably well known to the higher echelons of New Labour, but of Clark, who is former drummer for Seventies’ heavies Uriah Heep.

But commerce knows no socio-political barriers these days. Nor does politics necessarily recognise commercial bounds. It would nevertheless be over-egging this particular recipe by suggesting that Norman’s latest appointment was any more than a shrewd investment in a vibrant sector, were it not for the broader picture of music retailing.

Note, in this context, that there is an alleged “price war” currently being conducted by supermarkets in the retailing of compact discs (CDs). Regular readers will know that I’m chary of supermarket price wars. As others have argued more cogently, the big chains have a habit of loss-leading non-essential lines, while cleaning up at consumers’ expense on core items.

The “CD war” is a variant on this syndrome. The supermarkets are selling CDs below margin not so much to attract custom for other, profitable lines, but in order to buy market share ahead of the music industry’s next step in the digital revolution. And who do we find in the vanguard of the current aggressive pricing of CDs? Step forward Tesco, which just happens to consider its Internet business to have so much potential that it is planning to spin it off.

There are more prosaic reasons for the CD price war. The supermarkets must recognise that there is little or no liquidity in music retailing, at least in its current formats. Witness Richard Branson’s disclosure that his Virgin and Our Price retail outlets will be throwing in the towel on traditional music retailing the cashflow mechanics are said to be particularly arduous at those chains in favour of mobile telecoms retailing.

With old formats for retail music, like fossil-fuelled power, reaching the ends of their useful lives, retail majors may take the view that it’s time for a clearance sale of old stock. But my bet is that they have an eye to the future for digital distribution and that Norman and in due course many more like him will be concentrating their efforts on developing new revenue streams for such retail sectors that lend themselves to the digital download.

George Pitcher is a partner of issue management consultancy Luther Pendragon