New spin on vinyl: Bundled MP3s

These vinyl-MP3 packages command a premium.

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(Fortune Small Business) -- Like many music retailers, Nathaniel Bernier was getting squeezed. His store, Wild Rufus Records, in the seaside town of Camden, Maine, was selling fewer CDs. It was suffering as a result of the music industry's broader woes - CD sales nationwide were down a steep 17.5% last year. To make matters worse, the local Wal-Mart (WMT, Fortune 500) was beefing up its music section and drawing customers away.

So Bernier, 35, came up with a solution that married convenience with cool. He decided to focus on selling old-school technology - vinyl records - bundled with pass codes that allow customers to download MP3 versions of the same songs when they get home. For audiophiles, it's the best of both worlds: the rich, analog sound of vinyl for home listening and a digital version they can take anywhere.

A few labels, such as First World Records and Saddle Creek, had begun experimenting with these hybrid vinyl-MP3 packages. Bernier was attracted by the profit margin: A Ben Folds Five hybrid set, for example, retails at $24, a substantial markup on the $15 Bernier pays for it.

"I sell what makes people happy," he says. "They're going to want that experience no matter what the economy does."

The hybrids delighted the store's iPod-toting customers, who associate vinyl with popular DJs - and can't find it at Wal-Mart. In 2008 more than 40% of Bernier's sales came from vinyl and hybrid packages. His vinyl sales alone were up 100% over 2006. (National vinyl sales were up 46% in the same period, according to the Recording Industry Association of America.)

"CDs are an outdated mode of digital storage," explains music blogger Josh Madell. "Vinyl seems to be a lasting format."