IQ News: CDnow Shifts Strategy From Spending to Selling

In an effort to improve the bottom line, Fort Washington, Pa.-based CDnow has shifted its focus from ad spending to ad selling. The move, months in the making, possibly could make the beleaguered music e-tailer a more attractive package for potential investors or partners.
Last week, the company reiterated its plans to name a new strategic partner by the end of the quarter. “We are on schedule with our investment process and we expect to announce a deal with a merger partner/investor by the end of the quarter,” CDnow chief executive Jason Olim said in a statement.
The announcement by Olim came on the heels of a report issued by Goldman Sachs analyst Anthony Noto, who predicted that “CDnow is less likely to survive as a stand-alone company.” Noto further projected that CDnow would have a negative cash position of $4.6 million by the end of the third quarter and negative $18.2 million by the fourth quarter. But, Howard Blumenthal, senior vice president of media and sales at CDnow, shrugged off the doomsayers, saying, “We are focused on the here and now, rather than the analysts’ predictions.”
In keeping with this philosophy, it’s full speed ahead for the e-tailer, which looks to expand its base of advertisers and sponsors to augment its CD sales. The site, which averages 4.7 million users a month, plans to monetize those eyeballs by delivering them to advertisers. “We are selling our customers and audience to another advertiser,” Blumenthal said. “Other sites are using our audience to build their audience.”
Originally just an e-commerce venue, CDnow has added content, such as the latest news on bubble-gum pop queen Britney Spears, and events such as a behind-the-scenes-peek at 14-year-old blues sensation Shannon Curfman. The new commerce/content model allows advertisers to buy space on the site, ranging from traditional banners, buttons and text to middle-of-the-road sponsorships and integration opportunities to innovative event boutiques and preferential placements.
CDnow reports that total ad revenue for 1999 was $8.9 million. In Q1 2000, the site posted $3 million in ad revenue, a nearly 350 percent increase compared to last year at the same time.
Although the music site has not halted its own marketing efforts altogether, it has scaled back its ad spending significantly. Initially, like most dot-coms, the company poured big money into brand building. Now that they’ve established a name, however, they are turning their attention to customer retention. The site reports that 66 percent of its customers are repeat visitors. Through rewards programs and personalized e-mails, CDnow hopes to keep loyal customers coming back.
In addition, the site boasts an affiliate network with more than 250,000 members, including AltaVista, Ask Jeeves and DoughNet. Affiliates earn between 7 and 15 percent commission when visitors to their sites click on the link to CDnow and make a purchase. The program, said Blumenthal, accounted for 5 percent of CDnow’s total revenues for first quarter sales in 2000 and 9 percent of new customers for that same quarter. Recently, the e-tailer offered its affiliates the option to add an ePod, a transactional Internet advertising showcase, to their sites. “We are changing the meaning of affiliate programs on the Internet,” said Blumenthal.