Online Music Retailer Faces the Realities of the Internet Economy
BY Lisa Chadderdon
Inc. magazine profiled the start-up CDnow in its Anatomy of a Start-Up series in June 1996. In January 2001 Inc. checked back in to find the once-hot Internet music retailer suffering from big losses and plunging stock values.
Founders: Jason and Matthew Olim
Vital signs then: Twin twentysomething brothers launched what was -- back when they started it, in 1994 -- an anomaly: a virtual store, on the Internet. From their parents' house near Philadelphia, the Olim brothers spent about $80,000 (chump change by today's dot-com standards) to create the online storefront, which they then grew from their own rocket-fueled revenues. The company pulled in $2 million in sales in 1995 and expected to hit $12 million in 1996.
What the experts said: One praised CDnow for its ability to keep costs down, reach a global audience, and deliver a product to consumers quickly. Michael Sullivan-Trainor, then the director of Internet commerce at International Data Corp., said, "CDnow's experience to date suggests that it can go the distance." The big looming question was competition, for if CDnow could come out of nowhere and make millions, why couldn't someone else? Competitors and music industry experts suggested that CDnow should leverage its existing popularity and diversify its product offering.
Vital signs now: The company's sales grew -- to $147 million in 1999 -- but so did its losses. (It posted losses of $119 million in 1999.) CDnow both benefited from and fell victim to the investment community's hot-then-cold treatment of Internet stocks: it went public in 1998 at $16 a share; its stock shot up and then took a nosedive. Last July CDnow was trading at about $3 a share, and German media giant Bertelsmann AG agreed to acquire the company for $117 million in cash. (Full disclosure: Gruner + Jahr, a Bertelsmann company, acquired Inc. in August 2000.)
What the experts say today: "The outgo was bigger than the income, which is never good," says Robert Labatt, a research director for Gartner, a research and consulting company in San Jose. "They built a brand in North America and a smaller brand in Japan, but they were unable to make that brand work efficiently enough to be profitable." Labatt has high hopes for CDnow's future under Bertelsmann's worldwide and capital-rich umbrella. And as for the much-touted database of paying Internet shoppers that CDnow's proponents singled out as a strong point: Labatt thinks that although the data alone are useful, "the sale and reuse of that data is becoming more of a thorny issue, just as it has become more tactical."