Nowhere Men

[2]Assumes frequent turnover and good supplier terms.

[3]More than half of the retail stores' sales are cash.

THE FINANCIALS (in thousands)
Sales:

*Jason Olim says that projections are "outrageously difficult" for him to make. A tripling of sales for 1997 "feels" about right. Expenses, and therefore profits, he says, are even harder to estimate in what is a wholly new kind of retail business.

WHAT THE EXPERTS SAY

Competitor
Don MacKinnon
President of Hear Music, a nine-store retail chain based in Boston

CDnow is extremely well positioned as the leading Internet retailer. It's capturing an audience the record companies are desperate to reach, so it should be able to improve its poor product margins by attracting substantial advertising dollars.

One of the Olims' key challenges will be competition. CDs are the first "proven" Internet merchandise, so everyone is going to jump into the game. The winner will be the company that finds the best way to use the technology to enhance the customer's experience. CDnow should focus on what Jason calls "adding value" and on what I call building a brand.

Industry observer
Michael Sullivan-Trainor,
Director of Internet commerce at International Data Corp., in Framingham, Mass.

CDnow is a sterling example of how the Web allows start-ups to come from nowhere and capture a significant share of media and consumer interest. Because it does business on the Web, CDnow can act like a national or even a global distributor, with low overhead and fast delivery. But there are no barriers preventing new start-ups or giant corporations from copying the company's success. That is the value paradox of the Web: anyone can create a storefront, but no one can create dominance.

In the future, Web storefronts such as these may turn over much higher volumes of business, thus generating greater margins for their owners. But that day will not come until consumers are comfortable with making credit-card purchases on-line, and that confidence will come as more large corporations enter this channel. CDnow and other young companies need to stay in the game long enough and remain distinctive enough to rise with the tide of on-line commerce. CDnow's experience to date suggests that it can go the distance.

Competitor
Jim Coane
President of N2K Inc., in Wayne, Pa., which operates Music Boulevard, a Web retailer

I would not underestimate the competitive advantages rooted in spirited and creative entrepreneurship, nimbleness, responsiveness, plain old hard work, and being early to market -- all characteristics of CDnow. It's going to be very tough, however, for the small, under-resourced competitor. Getting big fast is critical, and that takes access to resources -- people and money. Sustainable, long-term competitive advantages will be built around value propositions that are different from those existing today. CDnow and other companies will have to create revenue streams from sources other than the sale of CDs and advertising.

I also would not underestimate the competitive advantages derived from years of on-line experience, leadership and management from seasoned industry executives, valuable strategic alliances, innovative distribution relationships, proven technology infrastructure, and substantial financial and technical resources -- all characteristics of our company.

Industry expert
Pamela Horovitz
President of the National Association of Recording Merchandisers, in Marlton, N.J.

There are already data suggesting that computer users are often active music buyers. Also, the recent explosive growth in mail order and the direct-mail marketing of music should enhance CDnow's niche.

On the downside, price-driven search engines that allow shoppers to check the whole Web for the lowest price could quickly put pressure on CDnow's already slim margins. Second, traditional music retailers have been adding interactive kiosks that offer increasingly detailed information about records, including those the retailer may not stock, and listening stations that allow customers to sample the music. Those innovations may combine to devalue the value-added aspects of CDnow's Web site. Third, well-established brand names -- Sony Music, Tower Records -- will undoubtedly provide some well-financed competition, putting pressure on the uniqueness of the CDnow concept.

I would urge CDnow to carefully identify its future focus. For example, I'd be looking closely at offering games and other multimedia software through the on-line store. The browser software should work well for those products, and there are probably software distributors willing to play the same fulfillment role that CDnow's music suppliers do now.