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Musicland Stores slashed compact disc prices by up to $5 this holiday season to compete with a dangerous new pair of rivals: appliance discounters Best Buy Co. and Circuit City Stores.

It's the latest sign of the growing overlap between chains selling music, books, videos and entertainment systems.

"Entertainment retailing is all converging," said Beth Heming, an analyst with Piper Jaffray, Minneapolis.

Tower Records-and video, books and software-is now just Tower. Blockbuster's new music stores sell CDs alongside videos. And bookstore chains are testing new combination book-and-music stores.

Long the nation's biggest music retailer, Minneapolis-based Musicland's move to match the discounters' prices-$10.99 for new releases and $11.99 and under for most other discs-addresses the prevailing consumer complaint that CDs cost too much. Best Buy and Circuit City have played on this gripe, using lower-price music to build traffic in electronics and appliance aisles.

"Overall we've become more promotional in our marketing and advertising," said a Musicland spokeswoman.

Along with the new pricing, Musicland is offering an additional 20% savings on CDs, cassettes and videos at all of its 875 Musicland and Sam Goody mall-based stores in the weeks before the holidays.

Through its in-house agency, Musicland is boosting ad spending across all media to communicate its new pricing.

Musicland and other music retailers also have broadened their inventories to create warehouse or superstores selling books, videos, gourmet coffee and entertainment, in addition to music. But that strategy is pitting music retailers against another group of powerful entertainment companies: video and book superstores.

Since November 1992 Musicland has opened 45 Media Play units, a 50,000-square-foot superstore offering 65,000 CD titles; 80,000 books; 15,000 video titles; and 1,000 titles each of magazines and computer software.

Musicland calls Music Play its primary growth vehicle and will open another 50 of these superstores next year.

Media Play is competing with Blockbuster Entertainment Group's music division, now operating 562 video and music stores; Blockbuster also jointly owns 20 Virgin superstores with London-based Virgin Music.

Privately held Tower, Sacramento, Calif., is combining books, music and video along with computer software in its 93 U.S. units-15 of which previously sold only books.

Senior VP-Advertising and Marketing Chris Hopson said book sales through Tower music stores are roughly 36% higher than book sales through its pure bookstores. Tower has cut CD prices by $1 for the holiday season and is boosting electronic media advertising through its in-house agency to better compete with the discount electronics chains, Tower's "real competition," Mr. Hopson said.

"You've got Best Buy and Circuit City using music as a loss leader, and the music business is not growing very rapidly now that most people have done their conversion to CDs," said Terence McEvoy, an analyst with Janney Montgomery Scott, New York.

Still, this isn't stopping book superstores Barnes & Noble and Kmart Corp.'s Borders Books from adding music to their offerings. Borders in August bought a small chain of music megastores called Planet Music and in October opened its first co-branded store in Houston. Borders currently sells music in 60 of its 74 stores but is testing the co-branded unit as an alternative.

And Barnes & Noble, which sells music in 41 of its 267 stores, is using newspaper ads from Farago Advertising, New York, to drive its CD sales this holiday.

Even 207-unit Best Buy has begun sprucing up its entertainment offerings through its 19 new Concept III stores, which sell 65,000 CD titles, 12,000 movie titles and 2,000 computer software titles as well as big-ticket appliances.

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