What are you supposed to do when everyone starts using your bread-and-butter as a loss leader? Suffer and recapitalize, apparently. Venerable Tower Records is filling for Chapter 11 bankruptcy. The company is well run, well loved, and profitable for years, but has come under intense price pressure from multi-product stores such as Wal-mart and Best Buy that price their CDs at a loss in order to get foot traffic in the stores. This problem has been exacerbated by the simplification of music taste created by consolidation of formatted radio stations. If there's only five CDs people even consider buying in a month, why do you need a whole store full of CDs?
Despite the futurists promise that the internet inherently democratizes the proliferation of music, this "old school" phenomenon is creeping its way into the new school. Is there any doubt that Apple's reason for launching the ITMS is to sell more iPods? There aren't solid numbers for this, yet, but the paltry 35 cents Apple gets per sale, likely translates into a loss. Then why do it? It makes the high margin iPod so much more attractive.
If music retails is going to become a comparably profitable business again, the pricing/cost structure would need to change significantly. Furthermore, the prospects for a music-only store depends on increasing the diversity of music that is out there, so the store provides the service of helping the customer sort through their choices. Tower isn't dead in the water. Due to forces way outside their control (or ability to predict) the company can't be worth as much as they once thought it would be.