Half of 7digital’s 2011 downloads came through smartphones and tablets, thanks to new carriage on gadgets from Samsung, RIM (NSDQ: RIMM), Sony (NYSE: SNE) Ericsson (NSDQ: ERIC), Philips and Toshiba. But the new feature is being added through a HTML5 upgrade to its website, which had been neglected for three years, CEO Ben Drury tells paidContent.

The upgrade is not about a switch from ownership to unlimited access but, rather, about giving greater access to owned content. “7digital Player allows people to stream what they’ve purchased,” Drury says. “When you purchase a song from us, you really own it.” Previouly, 7digital’s web locker would let users re-download but not stream their songs directly.

HMV acquired half of 7digital for (appropriately) £7.7 million in 2009, when the company was loss-making. Now Drury says 7digital was in the black in 2011.

“We’ve moved a long way from that time,” he told me. “Since HMV bought their stake, our revenues have nearly tripled. We’re no Spotify, but financially we’re in a pretty good state relative to a lot of companies in digital music.”

Now 7digital is supporting the digital ambitions of a HMV which is seeing its core – retailing entertainment on plastic discs – diminish fast.

To compensate, HMV is selling more hardware like tablets and uses 7digital’s platform to power its own-brand digital music retail website. But it only avoided breaching bank covenants this month when record labels took HMV equity instead of money owed for supply.

“It was not a short-term fix – it was a substantive longer-term plan to support HMV,” Drury tells paidContent.

“There is obviously going to be the continued physical to digital transition over time. It’s shaping up to be a generational thing. It’s going to take a long time.”

For its part, 7digital, which maintains its core interest in selling music for ownership rather than renting access like Spotify, says it wants to to help HMV front up by “networking” rivals to iTunes Store and Amazon (NSDQ: AMZN) MP3…

A single 7digital account can be used on HMVDigital.com as well as 7digital’s roster of white label sites. “You will see those things coming closer together,” Drury says, referring to the HMV and 7digital sites.

The move means music and movie companies have likely written off money owed for supply are now literally invested in saving one of their main sellers of content on plastic discs.

The retailer, led by CEO Simon *Fox*, had faced a test by banks against its borrowings this month, after seeing Christmas sales slip 8.1 percent from 2010.

But on Friday it told the City its banks had waived the test and had drawn up new targets for annual tests due in April and July because, HMV said, of “a change in the nature of HMV’s relationships with its key music and film suppliers, which includes the intended grant of warrants representing 2.5% of its equity to these suppliers”.

HMV’s announcement included a ringing endorsement from the largest music label, Universal, whose UK CEO David Joseph says: “HMV is a vital part of the UK music industry and we are delighted that the support of the film studios and music companies is helping to secure its future. We look forward to working closely with HMV in the years ahead.”

In other words, the music and movie studios have a big interest in ensuring HMV can continue to operate as a going concern, maintaining sales of physical entertainment media that are nevertheless falling industry-wide.

why you should never take a lunch break – HMV shares up 100% in minutes

— Joshua Raymond (@Josh_CityIndex) January 20, 2012

Even though HMV says the deal “will have a materially positive impact on the Group’s profitability and cash flow”, the announcement contained news that HMV Group has increased its forecast for 2011/12′s annual loss to £10 million.

HMV has debts of around £180 million. It thinks the new plan can shave off half of that within three years if current trading patterns continue.

But that logic seems predicated on no further decline in physical media sales, and industry indicators do not point in that direction.

HMV’s strategy to compensate for that reality is to sell entertainment-related hardware and gadgets in stores and to increase both digital and mail order content sales conducted through its website.

It is also considering selling its live music division, even though that is the one sector of the music industry many analysts think can maintain growth through the disc sales dip.

In the five weeks to December 31, HMV (LSE: HMV) Retail sales were 8.2 percent down on 2010′s equivalent period on a like-for-like basis.

“In the 144 stores refitted with an extended technology range of portable digital products, technology like for like sales were up 51 percent …, an improvement in the previously reported average of 42 percent since the respective store refit dates,” the company told the City.

CEO Simon Fox: “The continuing actions to focus the business and to expand our technology offering are beginning to show through.

“We are seeing a combination of a slowing of the decline in music and film, and acceleration in the growth of technology. Undoubtedly trading conditions and the consumer environment remain challenging, but we remain confident in HMV’s future prospects.”

*Fox* did not quantify the supposed slowdown in the physical content sales crash, and the real issue is whether HMV has a growth strategy to emerge from it, since there certainly won’t be a reversal.

Stocking media gadgets like tablets and music players appears to be working, though puts HMV on a collision course with peers like Currys, countless other high street stores and e-tailers. HMV relaunched its digital content sales effort in 2011 but it has not yet gained tier-A consumer traction despite owning half of a jewel of UK digital media wholesaling, 7digital.

Remember, also, that HMV Retail’s figures include the benefit of growing gadget sales.

HMV still warns: “The economic environment and trading circumstances create material uncertainties which may cast doubt on the group’s ability to continue as a going concern in the future, and these uncertainties continue.”

In an interview with the BBC for its “You and Yours” consumer affairs program, Daunt said that the company’s e-reader development was “well down the planning line.”

He says that the device will be launched next spring. That’s a short timescale, considering that from the sounds of it, it’s a project that was initiated, or at least progressed, only after the company was bought by Mamut from HMV (LSE: HMV) earlier this summer for £53 million.

“[An e-reader] requires a certain investment and certain confidence in the future, which we have,” said Daunt, who earlier noted, “Luckily we have an owner who is prepared to invest in it.”

(Its e-commerce director actually discussed the possibility of a Waterstone’s e-reader back in May.)

When contacted directly for a response to this report, a spokesperson for Waterstone’s declined to comment.

Daunt believes that a Waterstones e-reader, tied together with its existing e-book store, could potentially provide Amazon (NSDQ: AMZN) a run for its money.

“We in Waterstone’s need to offer you a digital reader which is at least as good, and preferably substantially better, than that of our internet rival,” he said. “You will have a much better buying experience purchasing your books through us.”

His template? Barnes & Noble and its Nook line of products, which feature not only e-readers but devices that more closely rival the iPad and other tablets: “They have combined [the Nook] with the physical shop,” he noted, praising the concept of being able to use the Nook in the physical stores to increase footfall, and noting that the concept and the products seem to be working.

“[Barnes & Noble] has enormous and increasing market share. They are beating Amazon in their own backyard.” In its last earnings report in August, B&N said it had a 27 percent share of the U.S. e-reader market. At the end of 2010, it was 20 percent, so while it is definitely growing and the number-two to Amazon, it is by no means dominating at this point.

The news of course raises a whole lot of questions. Among them, who might partner with Waterstones for this project, and does the chain — one of the UK’s largest, but still only a UK chain — have enough capital, scale and digital muscle for such a product to succeed?

“Barnes & Noble spent $50-200 million building the Nook reader + ecosystem. All of Waterstones is only worth $50 million. Challenging,” noted Andrew Rhomberg, founder of the “e-book sharing” service Jellybooks in a tweet.

There is the question of whether Waterstones could partner with a provider of an exsiting e-reader — Barnes & Noble itself, or Kobo — or whether it might work one of the many e-reader device makers not tied to any existing store. The short timeframe and costs involved could point to a licensing deal rather than something built from the ground up.

Some of the digital content deals that Waterstones had in place when it was still owned by the media retail giant HMV have been thrown into question since the sale of the chain to Mamut, but Waterstone’s has maintained that the e-book supplier relationships would continue.

But perhaps the company has not really put its best digital foot forward up to now: “It’s one thing to launch an e-reader but another question to launch a rally great e-reader,” noted Benedict Evans, an analyst with Enders Analysis. “Waterstone’s currently has 90,000 titles on its e-book site, so they’ve got a way to go to building up their inventory.” At the moment Apple’s iBookstore has 260,000 titles and Amazon has over 700,000 titles in their UK storefronts.

Up to now, the closest Waterstone’s has come to selling an e-reading device is retailing Sony’s Reader in its stores. It says it sold one million e-books in 2009/2010.

“For HMV, it’s about making an orderly transition away from less reliance on physical entertainment products and developing an understanding around connected devices that have some entertainment angle,” Ben Drury of 7digital tells paidContent.

HMV bought half of the digital music distributor and retailer, which is well-thought-of though not always well recognised, in 2009 for £7.7 million, before the severity of its own crunch became apparent. HMV has been forced to sell its book retailer Waterstone’s and renegotiate its loans to stay in the game. Before that, however, it had already seen the need to stock more gadgets and games whilst reducing its core music stock – a move that has now been made top priority.

“You’re definitely seeing them recognise that consumers are more interested in connected devices,” says Drury, whose 7digital already sells HMVDigital.com’s digital music and Waterstone’s e-books and which has been enlisted to advise HMV on digital strategy.

“Consumers now have many connected touchpoints – there is a role for HMV in selling those devices, but also in educating them around services and, hopefully, using its own services. HMV is the biggest seller of headphones in the UK, for example – there’s a natural fit around that.”

As well as its own-brand music retail, 7digital powers a la carte song downloads for services including Songbird, Winamp and, until recently, Spotify. Its newest boom business line – perhaps in line with HMV’s own inclination to sell gadgets – is mobile and tablets, gaining carriage deals to sell music on BlackBerry, Playbook, Samsung Galaxy S2, Tab, Toshiba tablets and more.

“It’s our fastest growing market and a very significant part of our business now,” Drury says. “We’re seeing incredible results from BlackBerry and Playbook; we’re seeing a huge conversion of Playbook users using the music store, unbelievable ARPU and the tracks they’re purchasing is really encouraging for when the Playbook comes out in Europe.”

While 7digital goes on selling individual music tracks, it’s the unlimited-access model espoused by services like Mog.com, Rdio and Spotify which is gaining admirers lately. Despite a slowdown in individual-track purchases, that model still reigns, Drury says: “You may be seeing flattening in growth, but that’s just flattening of iTunes – we’re not seeing flattening in our sales.

“That model is still very relevant – people want to go in very occasionally, get Lady Gaga or Adele and maybe that’s all they’ll use in a given year. It’s catering for the mass-market – subscription services are so far away from mass-market penetration right now.

“It’s the free aspect that’s held Spotify up int he U.S.. And I’m sure it’s why they’ve had to change to the five-free-songs model in the UK – it’s a huge concession and very much changes the proposition.”

But Drury acknowledges things may be “in to a new phase now”, off the back of the growth in subscription services and lockers like iTunes’ new cloud service.

As for 7digital, “We’re doing very well, we’re growing like a weed,” Drury says. “We are more important than ever to HMV.”

Waterstones’ e-books are supplied through 7digital, the online music and books facilitator that is half-owned by Waterstones’ owner HMV (LSE: HMV). So HMV’s sell-off of Waterstones therefore divorces Waterstones from its e-book supplier..

But 7digital CEO Ben Drury tells paidContent HMV/7digital have a long-term agreement to go on supplying Waterstones with e-books.

And the same goes for aNobii, the soon-to-relaunch book discovery site jointly owned by book publishers and HMV.

But that doesn’t necessarily mean Waterstones won’t re-think its digital strategy. One idea might be to introduce its own e-reader in the same way Barnes & Noble (NYSE: BKS) has Nook and Amazon (NSDQ: AMZN) has Kindle.

Drury says the pace of e-book sales growth, especially in the U.S., is “incredible”. “It’s been far faster than happened in music – it’s already overtaken music in some markets.”

Anecdotally, the curve may not appear that great. Drury suspects e-book sales numbers are being “skewed” by Amazon Kindle buyers.

“They’re probably filling their e-readers up a lot when they first get them,” he says. “So I suspect we’re seeing a sligt bubble.”

Last year, HMV (LSE: HMV) Group took joint ownership of aNobii, a soon-to-relaunch digital books discovery and retail service backed by publishers. aNobii was all set to use the e-commerce and cloud storage technology of HMV’s 7digital to power its own retail.

But jettisoning Waterstone’s from HMV Group would appear to divorce aNobii from the bookseller. aNobii CEO Matteo Berlucchi tells me: “HMV remains the shareholder. We carry on with our strategy and we’ll see what happens to Waterstone’s in the next few months.”

Waterstones is not entirely isolated online – it already sells its own e-books on its web store. It sold a million e-books in 2009/10, mostly in .epub and .pdf formats, transferred to e-readers with Adobe (NSDQ: ADBE) Digital Editions Installer, which doesn’t work on my computer. It got in to the e-book game through an early partnership with Sony (NYSE: SNE), whose e-readers were stocked in stores.

The more pressing issue, now that e-book sales are beginning to actually take off, is: what should Waterstones be doing in this area? The company has high brand association with book consumers – maybe it should do its own e-reader, Waterstones’ e-commerce manager Alex Ingrams suggested at the recent World E-Reading Congress.

When asked if Waterstone’s should ape Barnes & Nobile, which came to market with its own Android-based Nook device (also available as iOS, Android and PC software), Inghams told delegates:

“It’s certainly interesting. Waterstone’s is looking for a new owner – there is a clear candidate – I would hope that new owner would invest in a similar way. There are a number of plans we can advance quite quickly that would move us down a similar line.”

Barnes & Noble (NYSE: BKS) debuted its Nook relatively early, Inghams explained, because: “The U.S. market is seeing quite a stronger decline of physical earlier. They are pushing Nook front and centre to make it work as their stores change.

“The fundamental question for us is, what is the right brand and what is the right device? Nook answers this very well.”

The sector is in flux, but a Waterstone’s e-reader and on-board store of any particular brand could help reduce the possibility that Amazon (NSDQ: AMZN) and Apple (NSDQ: AAPL) will have this market to themselves. However, it could be costly and time-consuming to come to market.

In one way, HMV’s sale of Waterstone’s is untimely – HMV has targeted technology-related growth areas for focus, and e-books is certainly that at present.

Reporting Christmas results, HMV had said “Progress at Waterstone’s this year has been pleasing” and ” improved like-for-like sales reflects the success of the turnaround action”. In the previous period, it had said “the recovery plan is on track” for the bookseller, despite its sales continuing to fall.

But the fortunes affecting both the HMV chain and Waterstone’s itself – the migration of consumer media spend from physical product to digital content – has apparently proved too challenging to sustain each effort. Borders has already vanished from the high street; Barnes & Noble now has a suitor, too.

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Last week HMV alerted the market to interest in Waterstone’s from multiple bidders although it emerged that Mamut, who counts Chelsea FC owner Roman Abramovich among his friends, was considered to be the front runner.

Mamut, who already owns San Francisco-based social networking site LiveJournal, already holds a 6.7% stake in HMV.

Mamut has bought the business for cash through A&NN Capital Fund Management, a company controlled by a trust in which Mamut has an interest. The deal is expected to be completed by the end of June.

HMV Group, which issued its third profit warning in April this year, put the 314-strong Waterstone’s chain up for sale in March.

The company said on Friday that the sale represents an “important step towards strengthening the capital structure of the remaining HMV Group”.

HMV said that it needs to reduce its borrowing requirements in the short term to “achieve a satisfactory refinancing” and “has concluded that the most timely and effective way to achieve this is through the disposal of Waterstone’s”.

“We expect this deal to enable the Group to achieve a reduction in the group’s borrowing requirements, and, in turn, focus on plans for transforming the HMV Group into a broad-based entertainment business,” said Simon Fox, the chief executive of HMV Group.

The proceeds of the sale – which will see £40 ($64.75)m paid on completion in June and £13 ($21.04)m in October – will be largely used to reduce HMV’s borrowing requirements.

“We are extremely pleased to have reached an agreement to acquire Waterstone’s and its great heritage,” said Mamut. “I believe that our investment and strategy will secure a dynamic future for the UK’s largest bookshop chain and I look forward to working with its booksellers in building on the principle of excellent bookselling, which is at the very heart of the business.”

HMV said that the sale is conditional on shareholder approval and also from the pension trustee, the pensions regulator as well as HMV’s banks “including a renegotiation of the group’s lending facilities”.

“Any such transaction would likely be subject to, amongst other things, shareholder, lending bank and pension trustee approval,” the company said.

“There can be no certainty that any transaction will be concluded and a further announcement will be made as and when appropriate.”

HMV Group reported that total group sales continued to slide down 15.2% year-on-year in the 17 weeks to the of April. Within this HMV UK & Ireland saw sales fall 18.8% with international operations, in Canada, Hong Kong and Singapore, down 6.7%. Waterstone’s reported a sales fall of 11.3%.

The company said in the 53 weeks to the end of April group profits before tax and exceptional items would be about £28.5 ($46.13)m. Year end net debt is expected to be £170 ($275.17)m.

This article originally appeared in MediaGuardian.

Don’t say “Last.fm for books”, but aNobii lets people put their reading material on a web “shelf”, share them with friends and discover related books.

The site was originally formed as a social network in Hong Kong in 2006, but those companies, led by HMV, last year invested an undisclosed amount in it, aiming to bolt on retail tools which will help users actually buy books they find.

“HMV and the publishers were keen to create an open platform in the rapidly growing market for digital books,” a Nobii tells paidContent:UK. “Against a backdrop of growing interest and activity in ebooks, they brought in internet entrepreneur, Matteo Berlucchi who set up a company that then acquired aNobii.”

It sounds like some of the best bits of Amazon’s own recommendation engine. aNobii is not disclosing the investment size. HMV owns the Waterstone bookseller and part-owns its digital distribution partner 7digital, so we wouldn’t bet against finding aNobii inside its own technology in future.

The company will be led by Berlucchi, the Livestation CEO, who will stay on with the online news video company. Ex Amazon (NSDQ: AMZN) Europe VP Simon Murdoch, ex eBay (NSDQ: EBAY) director Matthew Hardcastle, ex Reuters (NYSE: TRI) CFO and aNobii’s original founder Greg Sung will also take executive positions.

“We want to create a social commerce platform that will allow people to find, share and buy books beyond the bestseller lists with an emphasis on creating an environment where people can talk about the books they love,” Berlucchi says.

A HMV (LSE: HMV) spokesperson tells NMA: “Providing digital access to content is an important part of our transformation. Our relationship with 7digital will allow us to look at other entertainment content. There will be some announcements in the not too distant future.”

HMV on Wednesday reported 13.6 percent lower Christmas sales and a possible covenants breach. On paidContent:UK, Forrester analyst Mark Mulligan said explained: “Consumers are falling out of love with physical media products and unfortunately are not yet anywhere close to entering into whirlwind romances with premium digital products.”

In fairness, HMV CEO Simon Fox had seen the shrinkage of physical-media sales long ago – HMV has responded by stocking more gadget, game and music hardware, successfully reducing its reliance on CDs and DVDs. But, after last year’s gaming slump, not even this was enough to fend off a poor Christmas that saw its share price fall by over a fifth Thursday morning and which now looks like a thunderbolt moment for it in the migration to digital. Simon Waldman, who lauded Fox’s transformation of HMV in his book Creative Disruption, now acknowledges: “There isn’t going to be a Houdini moment here where they suddenly escape.”

If there’s no Houdini, 7digital nevertheless looks like magician’s glamourous assistant. It’s one of Britain’s best, but quietest digital media businesses, not just selling music under its own name but also facilitating music sales for partners like Spotify, Last.fm, the Songbird browser, Samsung’s Galaxy Tab and Pure internet radios.

When HMV bought half of 7digital in September 2009, CEO Drury told me: “I asked Simon Fox: ‘What’s HMV doing in digital? You’ve made several attempts and not really succeeded, you’re the biggest entertainment retailer in the UK’. Digital for them was a bit of a sore point.”

HMV has since made 7digital its facilitator for HMV.com music and Waterstones e-book downloads, and the company will now likely also start handling other content types for its parent. HMV proffered £300,000 worth in services from 7digital in the last financial year. But, seven months after the part-acquisition, HMV also scored a £600,000 share of 7digital’s losses.

Last summer, HMV confusingly separated its online retail sites for physical and digital content, with the latter site, HMVDigital.com, run by 7digital as what could now become an increasingly important touchpoint.

HMV could try to use its brand as a provider in the growing subscription online music space, though Spotify occupies a big slice of this, 7digital is a per-track retailer and Drury said in 2009: “The jury is still out on whether subscription can reach mass-market.”

If a big transition from physical to digital is the order of the day, HMV itself seems unconvinced and hamstrung. In June, Fox told investors: “Opportunities to create real value in digital are scarce for all involved, not least because of widespread competition from the free illegal market.

“Our environment remains highly competitive, with some retail and online competitors prepared to offer many of the same products to their customers at loss-leading prices.”

So HMV finds itself citing upcoming digital plans as a way out physical troubles – it has a great digital partner with which to do so, but it appears to think the digital opportunity is considerably smaller than the world of LPs and CDs from which it is emerging. Fox called 7digital a “long-term” investment, but it could now be called on to bring digital success sooner rather than later.