December 26, 2000, 9:55 AM

It`s not just Amazon vs. CDnow anymore; there`s a whole lotta shakin` online

By Joanne Cleaver

Editor in Chief

Like the ever-shifting sounds of popular music, a year can be an eternity in the annals of e-commerce. It was only last summer that CDnow Inc. was battling it out for the top music spot on the Web with Music Boulevard, which was owned by N2K Inc. The two were locked in a slugfest for the best banner ad slots, the smoothest customer service and the snazziest promotions with up-and-coming artists.

Then the companies announced their merger last October-at just about the same time that Seattle-based Amazon.com announced that it was selling more CDs through its site ($33 million in the fourth quarter of 1998 alone) than CDnow or Music Boulevard. Suddenly, the competitive landscape changed from “How can we beat each other” to “How can we beat Amazon?”

But that’s just one of the questions the newly reorganized CDnow is grappling with. Now that the duel between CDnow and Music Boulevard is over, the combined entity expects to save as much as $25 million in operating efficiencies in 1999 alone, largely by eliminating redundant advertising, marketing, administrative and fulfillment expenses. Having weeded out duplicate customers, the combined company boasts a customer base of 2 million, according to Rod F. Parker, senior vice president of marketing and merchandising for Fort Washington, Pa.-based CDnow. It’s spending heavily to expand that base as well, advertising extensively on MTV and offering free shipping on all orders in the weeks following the opening of the combined site in May.

CDnow, which recorded combined sales with Music Boulevard of nearly $100 million over the last 12 months, hopes to regain its preeminence in the music market while also staying a step ahead of the boutiques and bricks-and-mortar retailers that are crowding into its category. “The big story is the very big channel shifting that’s going on,” says Parker. “Yes, Amazon is selling music and we’re gaining customers, but the business is shifting from bricks-and-mortar to the online channel.”

Crowding the stage

In recent months, the field of companies chasing after the online music consumer has gotten more crowded than the ladies’ dressing room at Lilith Fair. Not only does CDnow have to compete head-on with Amazon, but there’s a Lollapalooza of other players taking the stage with their sites set on the same target audience:

- There’s Buymusic.com, the music arm of buy.com. The site’s 10% Below Guarantee Program promises to beat the top three competitors’ online prices by at least 10%. It’s also selling every single-CD title on the Billboard 200 at $9.95-well below the wholesale price and in many instances $3 or more below its online rivals.

- Getmusic.com, the recently consummated online marriage of industry giants BMG Entertainment and Universal Music Group (Newsline, May/June), quickly reversed its initial no-discount policy, slashing the prices of many of its hottest titles to compete with everybody else.

- Following in the footsteps of offline rivals Tower Records and Best Buy, London-based Virgin Megastores, which operates some 200 stores worldwide, launched Virginmega.com in the United States in May. Soon after, Torrance, Calif.-based Wherehouse Music, the country’s third-largest music retailer, unveiled wherehousemusic.com. (Wal-Mart, which sells roughly 10% of all recorded music domestically, has an online presence, albeit a minor one.)

- Even Michael Ovitz is getting into the act. The former Creative Artists Agency chieftain, who has rattled Hollywood in recent months through talent raids by his new company, Artists Management Group, is launching CheckOut.com in partnership with Los Angeles-based Yucaipa Cos. The sites will sell music, videos, and games through three individual Web entities.

Like everyone else in every category imaginable, these companies are jockeying for position in the soon-to-explode e-commerce front. According to SoundScan, which measures music purchases electronically, year-to-date sales in nontraditional outlets-which include not only Internet sales, but sales through 800 numbers, shopping channels, and sales at selected concert venues-accounted for about 1.5% of all sales to date in 1999. “Even though that seems like a small piece of the pie, the numbers are more than what they were a year ago,” says Geoff Mayfield, director of charts for Billboard.

And that doesn’t even scratch the market’s potential. Forrester Research projects that the online music market will explode from $890 million this year to $6.7 billion by 2003. If all that music were sold in the form of traditional CDs, the battle lines would be clearly drawn: online retailers would compete with both each other and offline retailers.

But music, like software, can be distributed directly over the Internet, and Forrester estimates that sales of downloaded music will escalate from $1 million this year to $1.1 billion in four years. Only a few problems stand between retailers and the challenge of a completely different distribution method that bypasses them altogether: the widespread adoption of a technological format, payment and royalty issues, and consumers’ grasp of the ease of downloading music.

Digital disc jockeys

That day may be coming sooner than expected. In April, software behemoth Microsoft Corp. of Redmond, Wash., unveiled a new digital delivery system called MS-Audio that enables surfers to download and play music from its Web site. In May, AT&T, BMG, Universal and Panasonic parent Matsushita Electric Industrial Co. pacted to develop and test Electronic Media Distribution (EMD), a secure technology that would provide consumers with an easy and convenient way to obtain and play music digitally. And America Online’s recent purchase of Nullsoft, the leading developer of MP3 players for the Internet, will expose that technology to millions more potential customers together with Spinner.com, an online music broadcaster recently acquired by AOL.

Following its own acquisition of Music Boulevard, CDnow is forging alliances with production outfits so that it will be a key distribution partner when direct digital distribution starts to hit critical mass. The company is expanding its international presence (foreign sales currently generate about 20% of CDnow’s revenues). And it’s talking to customers about other music-related things they buy, from books to tickets to sheet music. “They’ll look to us as a primary resource for those products,” Parker says. “This is important to create a growth product based on our music authority and our brand.”

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