IQ News: The Beat Goes On

Music was an early e-commerce hit, but its growth has only just begun. Do you know how many holes it takes to fill the Albert Hall? If you're the type of person who can I.D. this oblique Beatles reference, you may well be one of the 7 million U.S. customers who visit online music sites. Music retail online will rake in an estimated $300 million in sales this year, according to Jupiter Communications. That equals a percent or two of domestic music sales of $20 billion, meaning bricks-and-mortar types like Tower Records and Musicland aren't exactly quaking in their boots. But Jupiter projects online music will hit $2.6 billion in 2003, and you don't need a weatherman to know which way the wind is blowing. Big growth in this category is a given. But how will it develop? Currently, the business is dominated by two giants with diametrically opposed models: the mall-like Amazon and the vertically driven CDNow. Other online giants are sure to jump into the fray: Barnesandnoble.com, for instance, already has. And that's just the big guys. Altavista offers links to some 75 music retailers, from used CD shops and reissue specialists to custom CD-burners. While online CD sales have yet to soar, Jupiter analyst Ken Cassar believes they will follow the model set by the Net's e-commerce breakthrough segment, books. "Both can be "evaluated equally well from a Web site," he says. "There's no need to touch. [In fact, online stores can offer more info in the form of a wider array of sound clips.] Deep catalog is a benefit. You have the ability to cross-promote, to learn what your customers like and make recommendations. And there's the price paradigm"--that is, hefty discounting that is great for attracting customers if not generating profits. Cassar also sees "a distinct separation of the really, really big and the really, really small at the expense of the middle. [Middling] companies, with sales between $5 million and $50 million, will be acquired by the big players, like CDNow, or big companies like Virgin or Musicland or someone who wants to get into this space. I don't think the Web will support ten merchants in every category." The big boys are running way ahead of the pack. Although it doesn't break out figures, Amazon will gross an estimated $150-200 million in music this year, according to Mark Hardie of Forrester Research; publicly held CDNow is on track to surpass $150 million. Unless you're a VC examining the books of the smaller hopefuls, it's tough to get a handle how much business the second-tier players are doing; Cassar figures none of them tops $10 million. According to data from Media Metrix on unduplicated visits in August, the most recent month available, the music-centric sites that popped were CDNow (4.3 million), Tunes.com (1.2 million), Ultimate Band List (1.2 million), ARTISTdirect (800,000) and Tower (300,000). Broader Web merchants including Buy.com, Spree and Best Buy also ranked, but music sales can't be broken out. Greg Hart, Amazon's product manager, music, believes the company's continued dominance is a matter of user feedback and tweaking. "When we launched the site in June '98, we invited our customers to help shape it," he says. "For example, they wanted help being introduced to genres that are intimidating--classical, jazz, international. So every month we feature a title from each genre, with an essay on why it's a great place to get started. They can hear streamed pieces of songs interspersed with commentary by our editors." Features like this can help distinguish the music sites, which tend to become homogenized in selection and pricing since many of them order and ship through the same big wholesalers, such as Valley Music. Editorial extras, which may be homegrown or outsourced, include detailed track information on albums, reviews, interviews, news, contests, chat, links, webcasts and so on. "Content is key," says Hart. "It helps customers make an informed shopping decision." Will music get lost in the increasingly big tent that is Amazon? "We don't recommend toasters, but we do recommend other consumer electronics like Rio players [which play MP3 files] and DiscMans," notes Hart. "Anything that can add value, that you can do with one click, is useful." At the other end of the spectrum is CDNow. "There are two [shopping] models," says founder/CEO Jason Olim. "You might go to Wal-Mart or you might go to Tower Records. ... The hardcore fan isn't going to go to Wal-Mart. We'll always add things--tchotchkes, music books, custom compilations--but we're vertical." For heaven's sake, though, don't label CDNow a retailer; since merging last year with N2K's Music Boulevard, the once-catalog driven site is increasingly focused on content. "We're a music destination," Olim insists. "Our business is connecting people to music, not selling them products. ... We've got the best music news on the Web. We broke the story about which music would be in the new round of Gap ads. That's why they advertise on us now--after they stopped yelling at us." Some music retailers have seen ad revenues drop, but Olim is bullish. "We have 800,000 unique viewers per day, more than MTV gets," he claims. "In the first half, we brought in $2.5 million in advertising. We're new to the game, but we've become one of the top-50 ad plates on the Internet, with advertisers like Microsoft, Toshiba, GM. That's not something a Wal-Mart can do. You're seeing what happens when you take a commerce company and move it into the content business. A lot of people are trying to move from content to commerce and you know what? Commerce is the harder application." The Music Boulevard merger, Olim adds, almost doubled the size of the business. The pending merger with Columbia House music club--jointly-owned by Sony and Time Warner--will reshape the company again, providing it with a fresh base of 16 million customers, roughly $100 million in online sales last year, cross-promotions, and access to content and financing. (Olim will continue to run CDNow, but Sony and Time Warner will have two-thirds of the board.) Columbia House's $1.4 billion in revenues last year dwarfed CDNow's $100 million, while CDNow's $105 million loss would have swallowed all of Columbia House's $100 million cash flow. As for Barnesandnoble.com, it is playing catch-up to Amazon in music just as it was forced to in books. "Are we David or Goliath or both?" wonders Daniel Blackman, director of music, video and software for the four-month old site. The company is positioning its music site as "complementary" to its main business--selling books. "We want to be completely in synch with our book customers," says Blackman. "Online is about speed and convenience and selection, and it's a big value proposition to add CD's to that." Although a push into video and DVD is expected, don't look for this site to become much more horizontal, he adds. "Amazon is developing into a big mall and we're staying focused on the Barnes & Noble brand. You won't see us selling toys or lingerie. The further they move from intellectual property, the better it is for us." But B&N's music store is hardly an afterthought. "We've got breadth of selection, depth of content, great editorial," says Blackman. "We offer 16 main styles of music, each with its own homepage. Under Blues are a dozen different styles, like Country Blues or British Blues, then further substyles under that [Acoustic Memphis Blues, Classic Female Blues], a total of 1,100 different styles. It gives you the best of both worlds--depth and granularity of browsing." Among a welter of reviews (content provided, as it is at some other sites, by the authoritative All Music Guide site), interviews and chat, Blackman says, B&N offers "a community of users that will cross over to books and magazines and software, which makes it a richer community. CDNow and the others will have a hard time, because if I'm doing my Christmas shopping, I want to do it all at one site and not have to jump around." Treading among such giants, how much room is there for smaller outfits such as Rock.com, which is attempting to build itself into a vertical brand? Its content is a bit more distinctive than some other online stores, with a cheeky, Web-savvy attitude. (From the site's "Banned In Wal-Mart" section: "Frank Zappa's Jazz From Hell. Offense: Song 'G-Spot Tornado,' banned for suggestive content. It's an instrumental!") The site generates a goodly amount of original content, including popular travel guides to local scenes in great music cities and instant messaging. One of its writers, well-known rock critic Milo Miles, also fields a daily question. "We're trying to have a dialog with our users more than the behemoths can," says Julie Smith, executive VP/marketing. Rock.com CEO Kevin Sheehan adds that original content is worth the expense. "We did an extensive history of klezmer music and we ended up selling a lot of klezmer records," he recalls. Finding customers in the shadow of the big boys has not been a problem, he adds. "We've got an automated outreach program that's one of the core proprietary things we do. It lands us customers at a world-class rate, from $5-$25 a head. We've also done some very successful local radio campaigns. We've grown 20 percent a month since we began on the net a year and a half ago." Sheehan says they're looking to expand Rock.com's new download program, develop advertising and launch an auction service. "The Internet is a big-company game," he adds. "The only way to survive is to be one of the big boys. But we survived a couple of iterations already and intend to be one of the winners." So does CDworld, which is taking the no-frills approach. CEO Bruce Pettyjohn has developed a site based on what he calls "Costco pricing and Nordstrom's service. Efficiency is going to be the name of the game. We're all about the same price--we all source from the same vendors. Our advantage is to be cheaper. In the comparison search engines, we usually come up first or second." He is dubious about the value of editorial padding for bargain hunters. Plus, he says, "we just don't have the money to throw away. We'll definitely add more product information; a percentage of that is growing from our suppliers. But when you take a look at the cost of putting up the information, it's not economic. If you're making 20 cents on the CD and spending $6 for the info, well, it eats into your profit." That goes against the grain, but Pettyjohn believes "we'll see an evolution of how many people can afford to lose money." Although the online music segment will grow enough in coming years to provide lush pickings, some of these players will inevitably fall by the wayside. But that's the way it is in the helter skelter Internet environment. Or as noted online pundit John Lennon put it, "Tomorrow Never Knows."

Brand Marketing

IQ News: The Beat Goes On

Eric Schmuckler

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Eric Schmuckler