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

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.”

IRCE 2008 Conference Multi-Media CD-ROM

Amazon, meanwhile, isn’t about to surrender its status as the No. 1 source for purchasing music online. Jennifer Cast, music general manager for Amazon, makes no bones about the company’s drive to widen its lead over CDnow—and any other competition that might come along: “Our mission is to have the very best music store in the world,” she says.

Amazon is building customer traffic through its recommendation center with reviews and contributions from 16 music editors on staff; exclusive CD titles from artists such as Cheap Trick and Cowboy Junkies; and free digital tunes by the likes of Public Enemy and most notably, Sarah McLachlan.

Digital diva

Less than a day after Amazon began offering digital downloads from McLachlan’s forthcoming live CD, Mirrorball, the disc hit No. 1 on Amazon’s sales chart in record time. Soon after, five McLachlan CDs—including all three Lilith Fair compilations—were among Amazon’s top 20 sellers in the same week. “The traffic was fantastic,” says an Amazon spokesman.

“Books and music go together like peanut butter and jelly,” adds Cast. “Customers are used to going into physical stores where they can buy both.” Today, she notes, 30% of first-time purchasers visit Amazon specifically to buy music.

None of this comes as a surprise to Parker. While the merger was pending, CDnow and Music Boulevard executives were completely reordering the new company. Top priority for the next few months is to assure customers that there won’t be any glitches in customer service as the companies blend their ordering, fulfillment and customer service functions. Next is refining what Parker calls the “snowflake strategy” of creating a structure so that each customer has a completely personalized store.

“CDnow made sure that each store reflected the customer’s own taste,” he says. “Music Boulevard was great with e-mail, taking the store to the customer. Now we have an end-to-end snowflake strategy, with each customer having her own store and personalization strategy.”

Beyond the headline-making deals that pose the greatest threats to CDnow—which itself has been mentioned as an acquisition target—many smaller competitors are already nibbling at its market. When it comes to selling music, “It’s a false paradigm that one company will dominate the Internet,” says Kevin Sheehan, president and CEO of SoundStone Entertainment Inc. of Somerville, Mass. He boldly predicts that half of all retailing will take place over the Internet in the next 10 years, with six to 10 brands thriving in each category “because customers want the merchandise selection edited to their point of view.”

Meanwhile, Durham, N.C.-based DVD Flix.Com Inc., which sells movies and music online, intends to thrive not by tackling the big boys head-on, but by catering to the alternative music market. The company has partnered with the All Music Guide (allmusic.com) to leverage its database as a means of drawing in customers who might be seeking, say, reproductions of original 1940s swing music. Company President Eric Garrison is also hoping to work closely with many of the smaller independent labels and promote up-and-coming bands. “Truthfully, my market strategy isn’t to beat Amazon or CDnow,” he says. “I’m looking to take 2% to 5% of the market share and build a good base and keep the customers happy.”

Counting ‘em down

In the most tangible sign yet of the Internet’s emergence as a retail power, Billboard began publishing a 10-position chart of the top-selling CDs online in May. The magazine draws its numbers from sales by CDnow, CD Universe, SoundStone and others, reported to SoundScan, which tracks sales electronically. (The most notable no-show, Amazon, elected not to share its sales data with SoundScan for competitive reasons, according to a company spokesman.)

One of the reasons for tracking online sales is that many albums chart far higher online relative to their overall sales position, reinforcing the profile of the Internet purchaser as older, whiter, and more upscale than the average consumer. In Billboard’s inaugural Internet chart, the Cranberries hit No. 1 with Internet sales totaling almost 2% of its national haul. By comparison, its overall Top 200 Albums rank was No. 13 (although Billboard’s Geoff Mayfield reports that the Irish rockers were involved in at least one site-related promotion).

For all the hype, Internet sales have a long way to go before they provide serious competition for traditional retail outlets. In May, for instance, the English-language debut album of Ricky Martin gyrated its way to the top with first-week sales online in the neighborhood of 2,000 units—a mere fraction of the title’s national first-week numbers of close to 661,000 units.

Mayfield thinks it’s going to take longer for Internet music sales to make a serious dent into their bricks-and-mortar counterparts than many prognosticators believe—in part because of the demographic pull of many popular acts. Backstreet Boys’ May 18 release, Millennium, moved 500,000 units in its first day in stores—at least one day sooner than any online purchaser could get their hands on a copy. “If you’re a young person who loves music,” Mayfield says, “do you really want to wait that extra day to get it?”

Probably not. But that could change quicker than Madonna’s hair color.