Cdnow Inc

views updated

CDNOW INC.

Since October of 2000, CDNow Inc. has operated as a division of the Bertelsmann eCommerce Group, a unit of German media behemoth Bertels-mann AG. A leading online music retailer, CDNow sells more than 50,000 items including CDs, VHS and DVD movies, and digital music downloads. Along with making purchases, the site's roughly 700,000 daily visitors can download free music from a database of 650,000 samples; peruse album reviews, music industry news, and related content; and view video clips of interviews with various musicians. CDNow had approximately 4 million customers in the early 2000s.

RAPID GROWTH AS A DOT-COM STARTUP

After having difficulty locating information about various musicians in the retail music stores he frequented, Jason Olim dreamed up the idea of selling CDs on a Web site that also would house a database of the information typically found in a music encyclopedia. Jason recruited his twin brother Matthew, a Columbia University astrophysics student, to write the code for the site. In August of 1994, with $20,000 in capital, the partners launched CDNow from their parents' basement in Fort Washington, Pennsylvania. Visitors to the virtual store could search its database for any CD or artist and make a purchase with a credit card. To facilitate order fulfillment, Olim forged agreements with several warehouses, which shipped purchases directly to customers.

Within a year, sales at CDNow had reached $2 million. RealAudio sound samples were added to the site in 1996, allowing visitors to listen to various song samples from a CD before making a purchase. By 1997, roughly 500 new titles were being added to CDNow's database every week. That year, revenues jumped to $6.3 million. Advertising efforts in 1997 included links from leading online search site Yahoo!, live promotions on the Howard Stern radio show, and spots in leading magazines. Content offerings were enhanced with music reviews from "Rolling Stone," Spin, and other leading music magazines, as well as articles submitted by freelance writers. CDNow's e-mod (encoded music for online delivery) technology allowed the firm to legally transmit copyrighted music via the Web, although it did not actually begin selling music online until two years later. By the end of its third full year of operation, CDNow had become the leading music retailer on the Internet, with sales of $17.4 million and a market share of roughly 33 percent.

The Olim brothers took their firm public in 1998, selling shares for $16 each. They also launched My CDNow, allowing visitors to customize their shopping experience based on their musical preferences, and ShopperConnection, which linked their site to other top e-tailers. The purchase of superSonic-BOOM, the first online music retailer to allow shoppers to purchase customized CDs, allowed CDNow to create its Custom Shop and begin selling customized CDs. In December of 1999, CDNow began selling music downloads for the first time. The initial 13,000 tracks for sale, available in Liquid Audio format, included works by Tony Bennett, Johnny Cash, Frank Sinatra, and Beck. The firm also began selling VHS and DVD movies for the first time via a new virtual Video Shop. Sales in 1999 grew to $147 million. However, like most dot-com startups, CDNow found profitability elusive, losing $119 million that year.

IMPACT OF INCREASED COMPETITION AND DOT-COM FALLOUT

Despite CDNow's rapid growth, competition from the likes of Amazon.com and barnesandnoble.com began taking its toll on the firm in 2000. That year, Amazon surpassed CDNow in music sales. CDNow found it difficult to compete with Amazon's massive customer base and customer service savvy. A survey completed by Forrester Research Inc. ranked CDNow fourth—behind Amazon, barnesandnoble.com, and buy.com—on its list of the best music Web sites, citing poor customer service, unreliable delivery, and technology glitches as common problems faced by users of CDNow. However, the survey complimented CDNow on its buyers' guides, which helped users to select merchandise.

A merger deal with club-based music and video seller Columbia House, announced in July of 1999, fell through in March of 2000. This prompted speculation that the dot-com fallout and CDNow's resulting stock price plunge had soured the deal. Others pointed to CDNow's $30 million debt and lack of profitability—it had lost roughly $200 million since its inception—as reasons for the nixed plans, which caused share prices to tumble 28 percent. Columbia House co-owners Sony Corp. and Time Warner Inc. still invested $51 million in CDNow. However, reports that the firm might run out of cash by September pushed stock to a record low of $3.50. According to a March 2000 issue of Billboard magazine, after the demise of the merger deal, CDNow was perceived as "struggling to keep pace with market leader Amazon.com and as scrambling to find a partner with deep pockets before it runs out of money."

To cuts costs, CDNow slashed its advertising expenditures and closed its London office. The firm also began diversifying its revenue stream by increasing sales of ads, such as banner bars, buttons, and sponsorships, on its site. Customer retention programs, including reward and incentive schemes, were put in place. According to a June 2000 article in Brandweek, the changes were designed to "make the beleaguered music e-tailer a more attractive package for potential investors or partners." CDNow's efforts paid off in July, when international media giant Bertelsmann agreed to purchase the firm for roughly $117 million, or $3 per share.

Bertelsmann's e-commerce efforts had been formally launched in 1998, when the firm bought half of barnesandnoble.com for $200 million and created its own online retail book site to take on Amazon.com in Europe. By the time it began considering a takeover of CDNow, Bertelsmann had funneled roughly $13 billion into its Internet operations. For example, it had involved itself in the founding of Terra Lycos, created when Spain-based Terra Networks bought Lycos, a leading U.S.-based World Wide Web portal, for $12.5 billion. Bertelsmann secured itself access to the 50 million customers already using either Terra Networks or Lycos. CDNow's founders believed that Bertelsmann's market reach would allow their firm to better compete with Amazon.

In October, Bertelsmann merged CDNow into its newly formed Bertelsmann eCommerce Group, headed by former AOL Europe executive Adreas Schmidt. Jason Olim was named chairman of CDNow, which began operating as a wholly owned subsidiary of Bertelsmann. Believing that CDNow had built a viable brand, Schmidt maintained the CDNow name and planned to use the site mainly as a music hub for Bertelsmann's existing online music operations, such as its GetMusic site, a joint venture with Seagram Co.'s Universal Music Group. With access to Bertelsmann's deeper pockets, CDNow continued to grow in the months following its takeover. For example, the firm began offering wireless access to its site in late 2000 via deals with ViaFone Inc. and Sprint PCS. CDNow also saw its video sales double by early 2001 after expanding its video offerings to more than 70,000 titles and adding content such as film reviews and best seller lists to its Video Shop.