Music over the Internet: This song will self-destruct in one week

Telecommunications

Americas edition

Dedham

Feb 1998

Authors: Doug Allen

Volume: 32

Issue: 2

Start Page: 10

Abstract:

The Internet may be revolutionizing the recording industry, or, more specifically, the distribution of music. Music sites are popping up on the Web. To listen, music fans need a modem and sound card-enabled PC, as well as a player, software that translates or decodes files from the audio-file server into music. These early developments may set the stage for a revolution in music distribution .

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Copyright Horizon House Publications, Inc. Feb 1998

Don't look now, but the Internet is quietly revolutionizing the recording industry or, more specifically, the distribution of music. Music sites are popping up on the Web in the form of home pages for distributor outlets (such as www.towerrecords.com), record labels, and particular artists. The sites provide access to music sound files and give customers the option to purchase online. To listen, music fans need a modem and sound card-enabled PC, as well as a "player," software that translates or decodes files from the audio-file server into music. This software can be downloaded at no cost from several music vendor Web sites, including Liquid Audio at www.liquidaudio.com. Surfers have the choice of playing sound files in real time through a technology called audio "streaming" or downloading the file to their PC for later playback. In particular, MP3 (or MPEG-1 Audio Layer 3) streaming has been touted for its CD quality and excellent compression ratio (about 12:1). MP3 decoders are available for most computer platforms at http://barista.stanford.edu/m3c/download.html.

These early developments are more than hobbyist curiosities, however. They may set the stage for a revolution in music distribution similar to the way amazon.com changed the book retailing industry. A dramatic direct link is also created between artist and audience. "Vendors like Liquid Audio and N2K are moving to not just sell CDs on-line but to provide digital distribution as soon as an audience can record or rewrite downloaded digital content to a portable medium, like a CD recorder," says Mark Hardie, a senior analyst with Forrester Research. "The PC won't be the appliance of preference for music listening, but it will be the point of sale." This model has two significant advantages. First, potential customers can browse a particular track on-line before deciding to purchase it or download a file that comes with built-in instructions for termination after a certain period (i.e., a few days). This allows the listener to sample a wider variety of music at no cost, spurring sales in the process. Second, artists can release music through the Internet more cost-effectively than through traditional channels. By eliminating the constraints of the retail industry, a greater quantity of material can be made commercially available.

Although more bandwidth is always desirable, a 28.8-kbps modem is sufficient for audio streaming sound files of near-commercial quality. Downloading music, on the other hand, is constrained by available time. In this case, files can be larger and achieve true CD quality (it takes about 12 minutes to download a CD-quality 3-minute song at 28.8 kbps, or four hours for a 60-minute CD). And even if congested backbone traffic delays are still frustratingly common, access technologies such as cable modems and xDSL will eventually make sound-surfing easier. -- Doug Allen

MOBILE HOMES: Wireless communications are used in 41 percent of U.S. homes, and 62 percent of new subscribers sign up for personal rather than business reasons, according to the Personal Communications Industry Association (PCIA). The trend is toward multiple wireless communication devices in homes, with an average of 1.7 devices per household. Wireless acceptance is highest among a demographic group characterized as -younger couples," with 56 percent of those polled in this group using wireless service.

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In the picture

The Economist

London

Jan 10, 1998

Abstract:

Steganography, hiding information inside other information, is taking off with the increasing amounts of digital images and sounds available. Bootlegging has always been a problem for artists, such as musicians, whose work is meant to be mass-reproduced. Once music and images are stored digitally, they can be copied perfectly, and if they are put on the Internet, the copying and distribution can cost almost nothing. A number of companies are developing digital watermarks to solve the problem. Watermarking techniques are discussed in detail.

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Copyright Economist Newspaper Group, Incorporated Jan 10, 1998

Thanks to computer technology, bootleggers have never had it so good. Are "digital watermarks" the answeR

IN A break with The Economist's general practice, this article is signed by the author. His dread of the editor's fury, however, enjoined him to keep his byline concealed. His first name is woven into this paragraph like an invisible thread, and to make it visible you need his age, since that is the number of characters (not including spaces) between each letter of his name, as well as the number of characters before the first letter.

Hiding information inside other information is called steganography (from Greek, meaning "covered writing"). It was originally devised as a way to send secret messages, by burying them in a prearranged way in innocuous material. As such it has been a favourite encryption technique since the time of the ancient Chinese, who embedded code ideograms in messages, much as in this article. But now that images and sounds can be made instantly available around the world, steganography is taking off with the opposite use in mind: using secret messages to protect the material they are buried in.

Bootlegging has always been a problem for artists-musicians, for example-whose work is meant to be mass-reproduced. But the bootleggers' customers have traditionally had to put up with second-rate goods. Once music and images are stored digitally as strings of numbers, however, they can be copied perfectly; and if they are put on the Internet, copying and distribution cost almost nothing. To prosecute mass-scale piracy, creators first have to be able to prove their creatorship, something that is much more difficult in a digital age. Thus a number of companies have been developing "digital watermarks" to help them.

Simply adding a name in digital formprinting it at the top of a photograph, sayis useless. It spoils the work, and since digital material is easy to fiddle with, pirates can simply remove it. A digital watermark has to be encoded so that it does not show, cannot be deliberately removed, and is still there when a picture or recording is altered, or when only an extract of it is used. This is quite a challenge.

Fortunately, whereas the opening of this article had to be written so that each letter of the author's name was in exactly the right place-which took ages-a picture or sound already created can have extra information added without making a perceptible difference. In a picture, for example, each pixel (ie, dot) is described by two numbers: colour and luminance, or brightness. The simplest watermarking method is to encode the information as slight changes to the luminance of the pixels in a small patch, and repeat the changes throughout the picture. The code can be read by overlaying the watermarked patches so that the small changes are multiplied and become detectable.

Digimarc, a company in Portland, Oregon, offers commercial watermarking services for images put on the Internet. It uses a similar but more sophisticated approach. It makes the watermark weaker in bland, uniform areas of a picture, and stronger in patches of sharp contrast (eg, the edges of shapes) where it is harder to see. Signum Technologies in Cheltenham, in Britain, goes yet further, arranging the watermark data in a different order in each patch. This makes the watermark pattern non-repeating, and thus less noticeable to the eye. It also makes the mark harder to remove deliberately, since doing so depends on knowing how it was scrambled.

But these methods are not impregnable. Digimarc had to issue an improved version of its software in September after its customers discovered that watermarks rarely stood up to JPEG compression, a standard Internet method of storing pictures more efficiently by cutting out less significant data. And image-editing software can be used to do things that will obliterate a watermark-for example, redrawing a photograph so that it looks like a relief cut in stone-while leaving a picture that clearly derives from the original.

A more robust technique is to convert the picture into the "frequency domain", essentially a graph of how quickly features vary across the image. The watermark is encoded as changes to parts of this graph, which is then turned back into a picture. Fairly large changes in the frequency domain can be made without degrading the image. Signafy, a spin-off of the Japanese electronics giant NEc based in Princeton, New jersey, is one firm developing this type of marking, and claims that its watermark will even survive in images that have been sent by fax-should anyone want to look.

Whatever the method used, putting a watermark in is only part of the story. To spot watermarked pictures being used illicitly, a program known as a webcrawler can trawl the Internet looking for them. However, prosecuting miscreants will rarely be worth the hassle. Datamark, a start-up in London, has begun offering a more big-brotherish approach with software designed for use by picture libraries. Datamark's technique injects a unique watermark into an image whenever it is downloaded. As a result, the watermark identifies not only who owns the copyright on a picture, but also who downloaded each copy. The gallery can then hold its customers liable if copies show up somewhere they should not be.

For now, most picture libraries will probably stick to more physical means of delivery, since downloading a sharp enough image over the Internet takes a long time. In general, the pictures on websites are too small, or their quality too poor, for their copyright to be worth bothering with, and most are pilfered only for use on other sites. This does matter if, for instance, the site that has stolen them is itself an online gallery that charges for admission-almost all of these being porn sites-but webcrawlers cannot get into such sites anyway.

Watermarking music may turn out to matter more. As with pictures, this involves making unnoticed changes to the material-for instance, to sounds at frequencies that people do not hear so well. Again, compression can trip things up, because it often cuts out precisely those frequencies. But while people may want to meddle with pictures, they generally prefer their music intact (which means the marks need not be quite so robust), and they tend to buy music more than they buy pictures.

At the moment, downloading a song at hi-fi quality over the Internet can take several times as long as playing it, but a number of small companies have set up as online distributors, in the hope that Internet connections will get faster in the next few years. They watermark their merchandise-but not as the first line of defence against piracy. For example, Liquid Audio, based in Redwood City, California, relies mainly on its own brand of encryption, which ensures that each piece of music sent out is encoded so that only the intended recipient can play it. The watermark is a fallback, in case the encryption is broken.

Watermarking has its limitations. As with all crimes, the more sophisticated the deterrents, the more sophisticated the criminals become. And, given the Internet's disregard for national borders, lawyers will often be powerless. But digital watermarks may find a legal role that has nothing to do with copyright. In these days of easy fakes, pictures from police cameras or interview recordings could have watermarks put in that are fragile rather than robust. Like the name of the (26-year-old) author at the start of this article, such watermarks would disappear with the slightest tampering; their presence would guarantee that the material was authentic. Whether you are faced with corrupt policemen or marauding editors, such rotection could be invaluable.

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Surf music

The Economist

London

Aug 16, 1997

A growing number of music firms are now betting that the Web offers a better way of merchandising their wares. Sony Music has just become the largest record label to try selling music on-line, bypassing its retailing distributors. Some $18 million-worth of CDs were sold this way in 1996, though most of these sales came via retailers, not direct from

record companies. The largest share, one-third, belonged to CDNow, a company that sells only on the Internet. Many analysts are bullish about on-line music sales. Jupiter Communications predicts $47 million in sales in 1997, a number that will roughly double every year thereafter to reach $1.6 billion in 2002. That would represent about 7.5% of the global market for recorded music .

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Copyright Economist Newspaper Group, Incorporated Aug 16, 1997 Selling books via the Intemet is already a big business. Selling records is going to be a lot harder

PAY a whopping $22 for a compact disc or waste an eternity searching racks for an obscure album, and the inefficiencies of the music industry will be all too clear. This business offers too many titles for most local stores to stock, faces too little price competition, and presents consumers with the constant risk of buying a piece of music they have not had a chance to hear. A growing number of music firms are now betting that the Web offers a better way. Sony Music has just become the largest record label to try selling music on-line, bypassing its retailing distributors.

This idea is not exactly new. Some $iSm-worth of cDs were sold this way last year, though most of these sales came via retailers, not direct from the record companies. The largest share, one-third, belonged to cDNow, a company that sells only on the Internet. But Tower Records (which had the second largest share, at 14%) and Camelot Music, both big American music retailers, also have Web sites. HMV and Virgin Megastores, Britain's largest music retailers, are planning to join them later this year.

The importance of Sony's arrival is that it is selling its CDs for less than the official "list prices" and closer to the discounted prices typical of retailers. This means it has gone much further than BMG and Warner, two record companies that also have Web sites but sell only a few of their titles on them and do not promote them heavily. Sony, by contrast,

will be competing headon with those firms that are its customers at the wholesale level. .

At first sight Sony's aggressive pricing looks like the sort of threat that persuaded Jeff Bezos, founder of Amazon, one of the Web's most successful businesses, to sell books instead of music when he set up online. There are thousands of book publishers, but the recorded-music industry is dominated by five big firms, which therefore wield formidable market power.

On the other hand, record companies have their own weaknesses when it comes to selling directly to the public. For one thing, they are not brands: listeners go in search of particular musicians, bands or styles, not labels. Admittedly, a few classical labels have established strong reputations and followings: Deutsche Grammophon at the top end of the market, for example, and Naxos for high-quality recordings by unknowns at bargain prices. But top classical recordings typically account for less than 2% of the sales of popular chart-toppers, and pop-pickers want Oasis the band, not Sony the firm.

Consumers therefore have little to gain from a direct connection to music publishers. Even if all the big labels moved on-line, retailers would still offer consumers more choice. And the big labels will not necessarily provide pop fans with the sense they crave of being "in touch" with their idols. That can be a nice earner, however bogus, and even when the idol is dead (see box on next page). Will Smith, one of the stars of "Men in Black", was formerly a rapper. He sold a lot of records but made most of his money by setting up a premium-rate telephone line on which fans could hear "messages" from him.

Although plenty of acts have their own Web sites, these are typically marketing efforts comparable to fan magazines and rarely offer a way to buy discs. A sensible band would have a "click here" button for ordering their albums, which would probably connect the buyer to the ordering system of Tower or CDNow.

In the end, offering a bigger choice than the high street is not going to be the way for either music companies or retailers to make a fortune on-line. By comparison with books, there are simply too few CD titles available-roughly 250,ooo in the world at one time, most of which are likely to be stocked by a music superstore. Amazon, on the other hand, claims to offer 2.5m book titles, easily outstripping the capacity of the biggest physical stores. The largest branch of Barnes & Noble has a trifling 175,000 book titles on its shelves.

Even so, many analysts are bullish about on-line music sales. One, Jupiter Communications in New York, predicts $47m of sales this year, a number that will roughly double every year thereafter to reach $1.6 billion in 2oo2. That would represent about 7.5% of the global market for recorded music.

The optimism is based on two advantages that Web sales confer. One is that CDs, like books, vary widely in price around the world, and the Web offers a way to sell them cheaply. Since CDS are fairly expensive for their weight, shipping costs are likely to be an even smaller proportion of the total value of an order than for books. Internet shopping should therefore drive down CD prices in expensive markets, such as Western Europe and Asia. A second advantage-this one not yet tested-is that the Internet could in principle offer consumers a chance to listen before they buy.

So far this is not much more than a gleam in the record companies' eyes. The on-line retailers offer few titles that can be sampled this way. This is partly because it still takes most computers too long to download even a snatch of music. Although this "bandwidth" problem keeps shrinking as technology improves, it makes listening laborious. In addition, sampling is an area where the concentration of the music industry has told against retailers.

Already afraid of piracy, the producers do not relish squirting their wares into cyberspace, where they might be easily copied. Samples already available on the Internet tend to come from minor labels, or are on the sites of bootleggers who illegally "upload" music from CDs they own.

Further into the future is another matter. With faster transmission and more storage capacity, it will become easier to transmit entire records over the Internet. Much later, customers should possess the technology to be able to download these records and copy them to their CD player, thus enjoying the gratification deferred by mail order. The distribution cost to the seller would also be driven enticingly lower.

Given these mouth-watering speculations, it is not surprising that several experiments in digital delivery are already under way. Some are "digital jukeboxes" run by pirates, mainly in America, who dodge the efforts of the Recording Industry Association to prosecute them for breach of copyright. Legitimate efforts so far involve only small independent labels, or else limited numbers of customers who have agreed to abide by copyright terms.

Deutsche Telekom is about to start a trial to sell records from main labels to 300 homes in Germany, and hopes to launch the scheme commercially throughout the country next year. In France, a cable-television system owned by Lyonnaise des Eaux is also testing digital-music delivery. So far it is working only with independent labels, but is in talks with EMI, one of the big five. These, however, are still "audio-on-demand" schemes: the music stays on a central computer, and buyers need to be online to hear their purchase. This is amazing if it works, but hardly as convenient as slipping a CD into your car's player, or ambling off to your local record store.

 July 1996, music distributor PolyGram Group Distribution

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Entertainment and electronic commerce

Business America

Washington

Jan 1998

Authors: John E Siegmund

Volume: 119

Issue: 1

Start Page: 33

Abstract:

Electronic commerce offers U.S. entertainment industries both opportunity for profit and risk of loss. The opportunities for profit arise as electronic commerce, through the nternet and the Global Information lufrastructure, offers new delivery systems for filmed entertainment and recorded music. The risks of loss result from piracy over the Internet of copyrighted movies and recorded music .

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Copyright Superintendent of Documents Jan 1998

 Electronic commerce offers U.S. entertainment industries both opportunity for profit and risk of loss. The opportunities for profit arise as electronic commerce, through the Internet and the Global Information Infrastructure (GII), offers new delivery systems for filmed entertainment and recorded music. The risks of loss result from piracy over the Internet of copyrighted movies and recorded music. Indeed, for the recorded music industry such losses have begun.

Entertainment And New Technologies

The Internet, a new technology, offers opportunities and risks similar to those associated with other new technologies of the last 20 years. Thus, for a decade, videocassettes and compact discs have substantially increased the revenues of the filmed entertainment and recorded music industries. Videocassette revenues are now a crucial part of the bottom line of U.S. film companies, and compact discs are the dominant format for recorded music. Yet, both these new formats also have offered copyright pirates new opportunities to inflict losses on industry.

Today, both the film and recording industries see potential profits in distribution of their entertainment services through electronic commerce. Representatives of the movie industry expect that within a decade electronic commerce will become a crucial method for distributing filmed entertainment.

Intellectual Property Rights Protection

Tempering this view of the potential benefits is the fear that control of piracy on the Internet may be very difficult, since a single Internet service provider can offer content worldwide, and is hard to track down. Indeed, the difficulties in controlling hate speech, child pornography, and pro-Nazi propaganda on the Internet may show the difficulties of

assuring IPR protection as well.

To date, the state of Internet technology has meant that the recorded music industry has experienced losses, but not the movie industry. The reason: Internet transmission rates are too slow to permit transmission of a movie, but do permit transmission of recorded music. Indeed, the recorded music industry has already taken legal action against several

suppliers of music on the Internet. The movie industry believes that whenever Internet technology can transmit movies, their problems will be similar to those of the recorded music industry. Furthermore, the U.S. industry points out that movies and recorded music in digital format will encourage piracy, since each successive copy is perfect, without the

degradation found in copies of analog videocassettes.

The industry has reason to fear the consequences of inadequate copyright protection. The International Intellectual Property Alliance (IIPA), an organization of U.S. trade associations whose 1,350 member companies are dependent on copyright protection, estimates that in 1996 U.S. copyright-based industries lost a total of $10.7 billion to pirates outside the United States. Of this amount, motion picture losses were $1.8 billion, and sound recording and musical composition losses were $1.2 billion. Computer programs and books account for the remaining losses. Yet, these losses are lower than

they would have been without the decade-long program of U.S. industry and government, including the Special 301 program, which pressed foreign governments to improve copyright laws and copyright enforcement abroad.

Finally, U.S. industry believes that the World Intellectual Property Organization Copyright Treaty of December 1996 will be valuable for protecting copyrighted works on the Internet, and thereby foster global electronic commerce. Article II of this treaty provides for measures against circumvention of access and copy control devices.

Regulation of Content

Regulation of content, including content quotas, may be hard to enforce, for the same reason that IPR protection may be hard to enforce, namely that a single Internet service provider can offer content worldwide. Furthermore, the industry's problems in complying with local regulations of content based on violence, pornography, and decency may become more complicated. Even though R-rated and G-rated versions of a movie may both be available on the Internet, assuring that a targeted population watches the version intended for it is very difficult.

By John E. Siegmund, International Trade Specialist Office of Service Industries U.S. Department of Commerce

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Record industry studies music distribution via the Internet

Source: Stores

Source Qualifier: New York

Date: Dec 1997

Authors: Susan Reda

Volume: 79

Issue: 12

Though selling downloadable recordings over the World Wide Web is still young, several recent developments suggest that electronically distributed tunes could become a major force in the not-too-distant future. One of those is improvements in audio compression techniques that have opened the door to sending large volumes of compact disc-quality music over the Internet. And, while enabling consumers to record their own compact discs at home over the Internet would seem to have the potential to render music retailers unnecessary, backers of new online distribution projects say that their goal is to expand the music market, not steal business from traditional channels. Some of the marketing issues involved are explored.

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Abstract:

Funky music; CIO

Fabris, Peter; Dec 1, 1997

Tens of thousands of consumers are already buying recorded music with a few mouse clicks on home PCs connected to the Web. On the Web, music buyers can read reviews and even listen to sound samples before purchasing a new CD. Most buyers have to wait at least a day for delivery before cranking their new discs, but a growing number of

technologically savvy music lovers have mastered the trick of recording digitized songs directly off the Web. Cdnow Inc., the biggest online music retailer, launched 3 years ago on a $20,000 investment. Today, CDnow owns 33% of the market, more than twice the share of its nearest competitor. That market is growing fast. Most observers agree that the

labels likely to benefit most from Web sales are smaller, niche labels. Major labels hope to exploit the Web's ability to link fans directly to reams of information about and even conversations with their favorite artists. Executives at major labels worry that Web-based distribution could lead to an out-of-control Internet piracy trade.

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New media

Marketing Week

London

Sep 18, 1997

Authors: Tony Martin

Volume: 20

Issue: 25

Start Page: 41

Abstract:

Whatever the fears of record companies, and some retailers, the future of music sales and distribution is online. However, little will change until recordable digital media become easily available for consumers.

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Copyright Centaur Communications Ltd. Sep 18, 1997

Burnett man moves to Webmedia Online agency Webmedia has poached Peter Beech from ad agency Leo Burnett to become its new managing director.

The appointment follows a top management restructure and demerger of the company, which has seen Webmedia's long-standing managing director Steve Bowbrick become chief executive and chairman of the 37-strong agency.

Last month, the company announced that its sister outfit NetNames was being demerged from Webmedia through an equity buyout by Ivan Pope, Bowbrick's fellow co-founder of Webmedia.

Beech, currently head of interactive marketing and new media at Leo Burnett, will take up his new position in mid-October, and will assume the day-to-day management of the company.

Meanwhile, Bowbrick will "concentrate on the long-term creative and strategic development". Beech is a former director of rival new media agency CHBi, where he handled clients including Direct Line and The Savoy Group of Hotels. He joined Leo Burnett in January this year, where he has worked on site developments for brands including Kellogg and Hula Hoops.

"The Internet industry and Webmedia have evolved at a cracking pace, and it was time to bring in someone with marketing agency management experience," says Bowbrick. Whatever the fears of record companies, and some retailers, the future of music sales and distribution is online. However, little will change until recordable digital media become easily available for consumers many in the music industry, the very notion of online music retail and digital distribution was seen until recently as the equivalent of the anti-Christ to any Godfearing "vinyl" vendor.

Now, with the likes of Tower Records, HMV, Virgin Retail and others champing at the bit to get their particular brand on the Web, it seems there has been a sea-change in its perception among some retailers.

But while they jump in with both feet, the record companies still seem fearful. Why?

Firstly, there is the fear of piracy. But you don't have to be a genius to recognise that record companies already leak digital copies (CDs) of their catalogue to the public that can easily be copied, turned into other recordings and sold illicitly. Why should the fact that the digital copy exists online make this situation worse?

Secondly, there's the fear of offending retailers, provoking them to take a particular record company's products off the shelves if they dare to sell direct to the public. The thing is, there won't even be shelves in the not too distant future. Digital distribution is coming.

Actually, it's already here, though not widely used. Delivery technology is good, quick, intuitive and stable. It even ensures the artist gets the same cut of royalty as from a "physical" sale.

This technology gives punters the tools to download CD-quality audio direct to their homes. But there's no reason to suppose high street retailers need be cut out of the deal.

The future music outlet will be a host of "listening posts" where the consumer will be able to check out a record, hit the "accept" button, swipe a credit card, and then pick up the music freshly downloaded on a recordable CD when leaving the store.

All those racks of CDs and the maze of nonsensical categorisation may go. What a shame! But, for some reason, some retailers want to hold onto all that stock, huge premises and major staff overheads.

There's every reason to believe music sold both direct to the consumer and through retail outlets can prosper in this digital environment.

But to achieve mass-market demand for downloading music, pricing and format problems still have to be overcome before we see widescale consumer adoption of the necessary hardware required.

Electronics retailers haven't yet convinced your average record buyer of the virtues of recordable digital media, like Mini-Disc or even recordable CDs.

Until these devices are cheaply bundled with your PC or TV, allowing the downloading of music via cable modem, the revolution is offcially on hold. Sorry. Tony Martin is managing director of Music Network (www. music-network.com), a Web and Internet strategy specialist for the music industry. ONLINE DIGESTS ONLINE DIGESTS Verdict Retail, the analyst, has downplayed suggestions of a likely boom in electronic home shopping. Retail sales through television shopping channels or the Internet are growing, but are currently estimated to account for just one per cent of all home shopping, according to a Verdict report. It warns: "There is neither the technology nor the demand from the public at present to stimulate growth."

EMAP Pursuit, the sports magazine publisher, has launched a football Website based on its soccer title Match. Matchfacts.com (http: //www.matchfacts.com) aims to cover "every team, every game, and every goal scored in the UK - whether it's by Manchester United, Glasgow Rangers or Rushden & Diamonds in the Vauxhall Conference", says Terry Pratt, Match's publishing director at EMAP Pursuit. Barnes & Noble, the leading US bookseller, has confirmed it has signed up 40 online content providers to help promote its Web-based retail operation. It is aiming to match the sales success of Internet start-up Amazon.com, which is based in Oregan USA.

The number of Internet users in Japan is expected to rise from 4.6 million to 8 million during 1997, before surging to 33 million by 2001, according to international market research company Dataquest. Remember to bookmark our Website address: http://www.marketingweek.co.uk/mw0001

New Media is edited by Michael Kavanagh, who can be contacted on 100413.3070@compuserve.com

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The mother of all malls

Forbes

New York

Apr 6, 1998

Authors: Joel Kotkin

Supplement: Forbes ASAP

Start Page: 60-65

Abstract:

Online retail racked up sales of $600 million in 1996 and last year topped $2 billion. With roughly 150 million users by the year 2000, it could end up anywhere between $21 billion and $56 billion. Today, all e-tailing revenues account for barely a few days of business for Wal-Mart and barely a drop in the bucket of the more than $2.5 trillion total in retail sales. Even more ominous, most e-tailers are losing money. However, even e-tailing's rabid boosters may be underestimating the draw that online shopping holds for the world. That is because online commerce is at the nexus of powerful trends that include demographic and social shifts, evolving consumer attitudes, and even the broad sweep of retail's history. Any one of these trends - combined with sure gains in Web connection speeds and the newer crisp-picture, flat-panel displays - would be enough to make online commerce a winner. So far, attention has been focused on the brash rising stars such as Amazon.com, CDnow , and Virtual Vineyards. But the long-term success of these early sites is by no means assured.

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Kind of green

Mediaweek

Brewster

Mar 23, 1998

Authors: Anya Sacharow

Volume: 8

Issue: 12

Abstract:

Jason Olim was just 28 when he took his company CDnow to market last month. The company has helped create a completely new channel for distributing consumer goods - music CDs - directly to people online. The company now has a market value over $340 million. CDnow launched as a collection of reviews merged with a database. The site has evolved to include intelligent recommendations, recorded samples, recommendations and a customer service department filled with people who know a lot about music.

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Copyright ASM Communications Mar 23, 1998

He's just 28, but Jason Olim has a hit on Wall Street with CDNow,

Jeff Bezos took Amazon.com public at the age of 33. Bill Gates was 30 when Microsoft hit the Street in 1986. But the Internet IPO club's latest member couldn't wait that long-Jason Olim was just 28 when he took his company CDnow to market last month. Does this mean Olim is a more precocious Internet mogul than the stars of Seattle and Redmond? Well, it might be a little early to be reserving magazine covers, but Olim has more than a little in common with those other cyber-entrepreneu Like Bezos, Olim's company has helped create a completely new channel for distributing consumer goods-music CDs-directly to people online. And though he didn't quite get his start in his parents' garage, Jason and his twin brother, Matthew, older by 40 minutes and the company's principal software engineer, did launch the company out of their parents' basement in Ambler, Pa., a suburb of Philadelphia.

Today, CDnow has relocated to an old department store building in Jenkintown, Pa.-and the company that was once a rumpus-room enterprise now has a market value over $340 million. Sales for the December 1997 quarter were nearly $8 million, and daily visits to the CDnow web site currently number over 120,000.

Not bad for a four-year-old company, formed while Jason Olim (who studied computer science at Brown University) moonlighted from his job as a software engineer. His brother Matt, who studied astrophysics at Columbia University and was in graduate school at Penn, learned computer programming to take on the project.

Matt turned out to be the tech guy and Jason was the business brains. "He's one of the smarter people you'll run into," Jason says of his business partner-brother. "He also didn't have the time constraints other people had."

"We're very complementary," says Matthew. "When we started, it was an issue of defining our roles. We had disagreements about how to do things but ultimately we worked things out by defining our roles."

It was the usual recipe of non-stop work and a good entrepreneurial idea combined with emerging technology. "I think I had entrepreneurialism in me from birth," Olim says. "My parents said I didn't like to play with my toys. I liked to break them and put them back together." His site, Olim says, is "clearly a labor of love." Computers and music have been the obsessions of his life; he played in jazz and rock bands throughout high school and college.

Indeed, the premise for starting CDnow was built on Olim's desire for a better music store. During college he went looking for Miles Davis' Kind of Blue at the record store: "I was in the jazz section and saw a guy working there and figured he knew something," Olim says. "But he just said, `Miles Davis is over there."' From that experience Olim developed an idea about how to make a better music store-better information, better service.

CDnow launched as a collection of reviews merged with a database; Matt personally handled all the first incoming orders. The site has evolved to include intelligent recommendations, recorded samples, recommendations and a customer service

department filled with people who know a lot about music.

"His whole thing is about music discovery," says Scott Heiferman, chief executive officer of i-traffic, New York, CDnow's online ad agency. "He feels that CDnow can make a real, genuine impact on people's lives by helping them discover new music."

To build the brand, the company maintains strategic partnerships with Yahoo, Excite and GeoCities. According to its SEC filing, CDnow also spent $3.9 million on a national ad campaign that ran on ABC and CBS. About $1 million went to CBS for three spots during the Grammys and one later on Letterman, an investment that Olim says paid off in traffic. Still, under the filing's "Risks and Uncertainties" section is a laundry list of Internet perils: the uncertain growth of online commerce, reliance on merchandise suppliers, online commerce security risks and substantial competition.

"It's a constant effort," Jason says, "to grow our market and get people to shop online. It's a multi-hundred-million-dollar enterprise in these categories. We're finding there are willing customers out there. The trick is to get the message in front of them." -Anya Sacharov

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 New campaigns

Adweek

Eastern edition

New York

Feb 2, 1998

In an attempt to give a "faceless" product a distinct personality, online music store CDnow's first national campaign features fictitious pitchman Ian Plimsoll, "the world's greatest roadie." In one of five 30-second TV spots, all filmed in a style reminiscent of the spoof "rockumentary" This Is Spinal Tap, Plimsoll is interrupted from his backstage work by an unseen CDnow representative who introduces him to the idea of shopping for music online. Plimsoll responds with the revelation that the service would allow him to "discover music naked ... like Woodstock deja vu." The tagline is: "The online music store." The other spots contain riffs in a similar vein. "We wanted to reach the avid music fan, aged 30-plus, who's too busy to shop for music," said Kirk Mosel, associate creative director at Hampel/Stefanides. The first spot in the $10 million campaign broke last week; the remainder will roll out through February. Many online music stores are cropping up on the Internet. Tower Records has created an online outlet, and Amazon.com, the cyber bookseller, will introduce a music store online in the near future. Hank Kim

 
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 Our friend electric

Marketing

London

Jan 29, 1998

Authors: Dave Sumner Smith

Start Page: 28-31

Abstract:

The Internet is rapidly changing the world of retailing, but rather than seizing the opportunities that are there, many retailers are adopting the ostrich strategy - or even worse, they view the Internet as an enemy. Retailers who dismiss the Internet should heed the lesson that specialist retailers such as greengrocers and butchers learned when they were overtaken by supermarkets. While US companies seem to be opting for embracing the Internet and facing up to the business changes needed to succeed, their UK counterparts are still just toying with the idea. Some of the success stories on the Internet are highlighted, including bookseller Amazon.com, CDnow and General Motors.

Full Text:

Copyright Haymarket Publishing LTD. Jan 29, 1998

Retailers that see the Internet as a source of irritation or competition are failing to take advantage of its potential, writes Dave Sumner Smith

The Internet is rapidly transforming the world of retail commerce. But rather than seizing the opportunities, many retailers are adopting the ostrich strategy-or even worse, they view the Internet as an enemy. Their approach mirrors that adopted by many traditional retailers when supermarkets first appeared in Britain. Well-established greengrocers, butchers and other retailers were quick to highlight the early supermarkets' shortcomings and dismissed them as a threat.

Yet supermarkets were more in tune with consumers' needs for choice, convenience and savings, quickly winning the minds - and money - of shoppers.

Those retailers dismissing the Internet should take heed. Just as the supermarkets have taken over from specialist retailers with their dominance reinforced by the move to `just in time' deliveries, so avoiding handling and storage costs - Internet retailing offers many advantages to consumers. Any element in the retail process which does not add value is being stripped away, with the cost benefits going straight to the customer.

This is leaving established retailers with a stark choice: embrace the Internet and integrate it in the marketing mix, or continue to view it as enemy territory and watch the new players steal market share.

While US companies seem to be opting for the first choice and are facing up to the business changes needed to succeed, their UK counterparts are still toying with the latter.

Most famous of the Internet success stories is that of bookseller Amazon.com. Founded in a garage in 1995, annual turnover reached $64m (L40m) within two years, mainly through offering 2.5 million book titles, many at discounted prices thanks to its highly automated structure and lack of retail premises. Yet only topselling titles are held in stock, with orders for the remainder being passed on to the publishers for direct fulfilment. For many consumers, the benefits of browsing in a book shop are outweighed by the cost savings and convenience of shopping online. Of all market sectors there are two in particular where existing marketers are in danger of being caught out by new media operations: the music and motor industries.

Musical interlude

As with books, music is ideally suited to online retail. With no need to actually see CDs, it is easier to listen to a taster online than in a shop. The trader has no need to keep CDs in stock, but can search the entire catalogue of all music products by an artist at the click of a button.

The target audience is ready and waiting. Recent studies by ROAR found that 39% of 15- to 24-year-olds have Internet access. The sites most commonly visited by the group are music-related, 11% of 15-yearolds have already purchased music online. Web sites can also add value by incorporating reviews, concert itineraries, discographies, sound samples and other multimedia technologies, as well as offering online downloads.

In the US, there is a plethora of companies offering music online and among them are the traditional retailers who have been persuaded of the value of the medium. Tower Records has a transactional US site (www.towerrecords.com) incorporating an online magazine, new release information and easily programmed search engines.

Other Web sites have developed an innovative range of value-added benefits unique to online transactions. At www.cduniverse.com, consumers can not only buy online, but also find lists of artists related in some way to the one under consideration. CDnow (www.cdnow.com) accepts Ecash and has a 'lunchbox' feature whereby the company makes up a surprise package of music for you to consider.

Such fresh thinking has made CDnow the largest online music retailer in the world. Meanwhile, in the UK, there is very little happening, although Tower Records and HMV promise to go transactional later this year.

Similar changes are taking place within the retail motor industry. The concept of visiting a dealer with a franchise to sell the products of just one or two manufacturers, when there are scores of brands and thousands of new vehicles to choose from, is fundamentally flawed. Buyers recognise their need for wider information on products and prices - and the Internet is perfectly positioned to provide it.

Rather than simply finding a list of Web sites where one can buy CDs, it is possible to define parameters and effectively tell one's merchant agent, "I want the new CD by Natalie Imbruglia by the weekend. Find the cheapest one on the Web."

Some companies acknowledge the massive impact that such tools, and other new technologies, will have on the world of retail. Others don't, and could well end up paying heavily for it.

Online music sales, currently worth only L440m of a L35bn market, will account for 7.5% of the 2002 total, according to research company Jupiter Communications. A driving factor will be the ease of downloading music online.

Youth market research group ROAR found that 20% of their study group would be interested in downloading music.

The technology now available can compress a few minutes of song into a 2Mb file, where it previously took up 50Mb, thereby drastically reducing download time. The near CD-quality, however, means that the music industry has a lot of work to do setting up retail systems and protecting copyright.

Disc drives

With the imminent arrival of DVDs in the UK (five-inch discs which can carry and record software, video and sound) as well as re-recordable CD-drives for the computer, consumers will soon be able to record their own pick'n'mix CDs at home.

As James Corsellis, of Corsellis-Montford Interactive, points out: "It is extremely likely that one of these or a similar technology will be incorporated within the PC in the very near future." This is a worry for record companies as consumers could end up buying fewer CDs.

While strategies can be adopted to minimise piracy, companies in the music, motor and other industries have to face up to international price comparisons on the Internet, especially now that search agents such as Jango are becoming available.

Almost 40% of CDnow sales are overseas, which isn't surprising when you can buy a batch of ten CDs for $15.30 (L9.44) apiece from a US Web site, including shipping and taxes, compared with L14.99 each from HMV in the UK.

The practice flies in the face of national licensing agreements, but with power in the hands of the Internet user the end results are inescapable for as long as UK companies persist with their current pricing policies.

Motor manufacturers in the UK have been as slow as the music business to grasp the nettle of carrying out transactions on the Internet.

The vacuum is being filled by companies such as Netica. In addition to an interactive list of 14,000 used cars and a daily updated motoring magazine with reviews of every model, its site (www.autolocate.co.uk) enables private motorists to order new cars.

Netica has also taken over the FleetWeb service developed in conjunction with a consortium of 40% of the UK's fleet buyers. By offering a common system for leasing companies to communicate with supplying dealers, it is expected to handle in excess of 75,000 fleet sales this year.

"It's not a question of `if companies move into online commerce, but 'when'," says Philip Jackson, Netica's director of Fleet Business.

Michael Page, of database marketing and services agency Acxiom, says: "The future can't be ignored. Traditional retailers are going to have to make things happen for them. Retailers selling only online don't have to worry about disrupting existing pricing arrangements or cannibalising sales from other outlets, and can also offer pricing incentives.

"But if traditional retailers stopped being so half-hearted and set to work on developing powerful loyalty drivers to retain customers, they have the brand image to succeed."

Companies that look on the Internet as a foe and deny its potential will see new rivals take an ever-increasing share of their markets, in the same way that specialist retailers have been overtaken by supermarkets.

The only companies that can profit from the change are those that view it as a friend and are prepared to examine the fundamentals of the way they do business.

Searchers: Internet search engines help users to find sites of relevant interest, but new, merchant agents, such as Jango which is now part of Excite, take the search on to the next stage by adding search parameters on price and availability of products and services

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That groovin' Web sound!

Fortune

New York

Jan 12, 1998

Authors: Andrew Serwer

Volume: 137

Issue: 1

Start Page: 138

Abstract:

More than a dozen companies are selling music over the Internet, mostly in the form of CDs, but only 3 companies - towerrecords.com. CDNow, and a company called N2K - are leading players. Each is fighting hard to become the dominant Web name in the category, a la Amazon.com in books. True, the entire online recorded-music market is expected to be only about $40 million in sales in 1998 (the top 3 will do between 45 million ad $12 million each). The most ambitious of the 3 contenders is N2K. The company has one of the largest CD selections online, and is backed by a group of very high profile investors.

Full Text:

Copyright Time Incorporated Jan 12, 1998

N2K thinks it'll rule online music retailing. Investors Herb Allen, Wayne Huizenga, and Paul Allen agree.

SOMETIME IN THE NEXT COUPLE OF years, selling music over the Internetmostly in the form of CDs-may become a profitable business. Getting from here to there, however, is going to be tricky. More than a dozen companies are jockeying for the hearts and souls of music-lovin' Net surfers.

For the moment three companiestowerrecords.com, CDNow, and a company called N2K-are leading players. All three are growing faster than a crowd of teenage girls outside a Hanson concert, and each is fighting hard to become the dominant Web name in the category, a la Amazon.com in books. True, the entire online recordedmusic market is expected to be only about $40 million in sales this year (the top three will do between $5 million and $12 million each). But after that, hang on to your headphones. Jupiter Communications expects online sales to hit $1.6 billion in five years, or 8% of total music sales.

The most ambitious of the three contenders is N2K. (The company's name was chosen-Lord knows why-as an abbreviation of "need to know.") The company has one of the largest CD selections online (200,000 titles-including obscurities such as Ry Cooder's theme-music CD from the movie The End of Violence). More important, it's backed by a

group of very highprofile investors, many brought in by the media investment-banking boutique Allen & Co. Besides Allen & Co. itself, which did a private placement for N2K before its IPO in October, investors with a stake in the company include billionaire Microsoft co-founder Paul Allen, Florida garbage and sports kingpin Wayne Huizenga, as well as

secretive buyout champ Ray Chambers. So far, investors are having a tough time: The stock trades at $15, down from $31.

So what do the big names see in N2K? "They have the best Website, and they see the big picture," says Jack Schneider, a managing director of Allen & Co. The big picture's important because while the idea of selling CDs online is compelling, music "E-tailing" (a phrase Robertson Stephens analyst Lauren Levitan coined to describe online selling) faces serious obstacles.

First, most CDs are bought by credit-cardless consumers under the age of 24. You need a card to buy on the Net. Second, sampling music over the Web, which could really help sell CDs, is still technologically awkward. N2K co-founder and CEO Larry Rosen acknowledges those limitations. "The demographic of the online shopper is different," he says. "Our average buyer is 32 years old. So we sell more catalogue than traditional music retailers."

N2K was founded in 1995 by Rosen, David Grusin, a Grammy-winning producer (and composer of dozens of movie and TV-show themes, including Maude), and Jon Diamond, an entrepreneur with ties to Allen & Co. N2K has office space in New York, a fulfillment center in Pennsylvania, and that's it. All inventory is owned and warehoused by a third party.

Rosen says what's most important now is establishing relationships with consumers-the company has inked deals to be the key music retailer for the AOL, Netscape, and MTV Websites, and says it has sold CDs to "several hundred thousand" people. Down the road Rosen and Diamond have more grandiose ideas. They picture a site where customers

can not only order CDs but also listen to live concerts, sample music, and ultimately buy and download music-songs, whole CDs-directly. "That is the future of music retailing," says Diamond dreamily. (For another take on the future of music retailing, see Above the Crowd.) This may all sound far-fetched, but N2K is already doing that on a small scale. It

recently distributed the latest album of the rock band The Tragically Hip, mailing CDs directly to customers who had first sampled the band's wares at its Website. The CDs were not sold in U.S. stores.

It will take a few years before direct music distribution becomes a major business -the legal and technological hurdles here are major. For now, N2K must do what every record retailer must do: Get customers. Sell them as many Celine Dion CDs as they can. And beat the hell out of the competition. REPORTER ASSOCIATE Liz Smith

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Imagine, no inventory

Forbes

New York

Nov 17, 1997

Authors: Jay Akasie

Volume: 160

Issue: 11

Abstract:

Jason Olim and his twin brother Matthew Olim started CDnow, an Internet music store, in 1994. By January 1995, sales were up to $100,000. For 1996, the company recorded $6 million in revenues, and Olim says he expects that figure to triple in 1997. Olim began by offering hard-to-find musical recordings. As more professionals use the Web in their offices, the customer base is becoming more female and musical tastes more mainstream. CDnow has more than 250,000 items available, but there is no inventory. When CDnow receives an order, a computer program tracks down the selection from the same distributors that supply the large retail music stores. The company just closed a deal with BT Alex. Brown Inc. for $10 million in private equity financing for a massive marketing push.

Full Text:

Copyright Forbes Nov 17, 1997

CD now has created the country's first virtual record store. But please, please don't refer to it as the Amazon.com of music.

Twin brothers Matthew and Jason Olim, founders of CDnow. The Web's largest music store caters to a crowd that doesn't have time for shopping malls.

 FIVE YEARS AGO Brown University student Jason Olim went to a large Boston music store in search of Miles Davis albums. The teenage sales clerks had never heard of the jazz legend.

From then on Olim began planning to open a record store for grownups. Let the other stores cater to the Top 40 crowd. "I wanted my business to be about rare products, hard-to-find products," says Olim. "Not your top-selling products. We're about eclectic tastes."

And about the Internet. Olim didn't have enough money to open a real store-and even if he had, how many locations could support eclectic tastes? But an initial investment of $12,000 bought a Macintosh, a Unix server, software licenses and fees for engineers to help with programming problems. His parents chipped in another $8,000 for graphic designers, print advertisements and a public relations contract. His twin brother, Matthew, fresh out of Columbia University with a degree in astrophysics, helped with the programming.

CDnow was up and running in August 1994. Soon after, the World Wide Web gave it a boost. CDnow posted $387 in revenue in its first month of operation. By January 1995, sales had risen to $100,000. For 1996 the company recorded $6 million in revenues, and Olim, now 27, says he expects that figure to triple this year as he broadens his offerings.

"Three years ago our customers were hard-core propeller-head types, people looking for the most outrageous, off-the-wall types of music," says Olim. As more professionals use the Web in their offices, the customer base is becoming more female, and musical tastes more mainstream. "They can shop from their desks and discover different albums related to what they like."

Don't tell Olim he has created the Amazon.com of the music world. Unlike the on-line bookseller, he has no inventory. When CDnow receives an order, a computer program tracks down the selection from the same distributors that supply the large retail music stores. He has more than 250,000 items available to him at all times.

"I feel sorry for Amazon," Olim says. "They have a loading dock. They have people packing and mailing. They have a huge staff running around." CDnow's office in Jenkintown, Pa. is staffed by 95 people, but there isn't an album in the place.

The company just closed a deal with BT Alex. Brown Inc. for $10 million in private equity financing for a massive marketing push. It is buying spot banners all over the Web. A new arrangement with Web browser Yahoo! links any page with a music reference to the CDnow homepage.

Music megastores like Tower Records are joining the on-line fray. But Olim says that the types of customers drawn to those Web sites do most of their buying in malls anyway.

"We're the ones with 2,108 Mozart performances on hundreds of albums," he says with confidence. "We have a content editor with a set of stringers who will tell you which album is best for you. I'd rather take advice from a guy who writes for Rolling Stone than some kid in a mall making minimum wage."

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Future shop: Music & video

Forbes

New York

Apr 6, 1998

Abstract:

A list of the best and worst electronic commerce Web sites for the music and video industries is presented. Winners include Tower Records (http://www.towerrecords.com) and N2K (http://www.n2k.com).

Full Text:

Copyright Forbes Apr 6, 1998

They're not DOA yet. but traditional music CD outlets could be murdered by online shopping sites. "This is one industry that will be rocked by e-commerce," predicts Piper Jaffray's Bill Burnham. Here's why: While online music revenues accounted for just $71 million of the $12 billion Americans spent on music purchases in '96, analysts say online revenues will easily double this year. Video shopping, meanwhile, is less important on the Net. Consumers appear to be waiting for bandwidth, due within the next two years, that will allow quick video downloading.

winners

 
Tower Records

...commands 14% of the online music business, selling more than 200,000 music titles and 3,000 musicvideo offerings from its site...a relationship with AOL helps this CD king rake in about $800,000 per month in e-commerce revenues. towerrecords.com /

Columbia House

...was last year's second most popular site on the Web retail circuit (behind Amazon) ... but to buy, customers have to join the Columbia House club... other drawbacks?... selection isn't great, and it still takes two to three weeks to get a CD, just like the company's traditional club... if that isn't appealing, go to Total E, totale.com, Columbia Houses newest site... selection is larger ( 185,000 music and video titles) and delivery speedier-overnight if you want... bonus: You don't have to join the club. columbiahouse.com /

losers

 
Virgin

... might have more than 60 megastores worldwide, but its U.S. Web site is far from world-class...it just advertises the company... it's not a sales outlet...the company's usually savvy entrepreneur, Richard Branson, is surprisingly nonchalant about e-commerce. virginusa.com/

Blockbuster

... is losing out, too... who wants to get online and search movie and music-video titles you can't buy or rent? blockbuster.com/

trailblazers

CDnow

... was one of the first online-only CD sellers, and its market share reflects that... the 4-year-old company claims 33% of all Internet music sales... that translated into revenues of $17.4 million last year, up from $6.3 million the year before...with more than 250,000 CD titles, CDnow is looking to expand...just went public. cdnow.com/

N2K

... has Paul Allen of Microsoft fame as an investor, and $66.5 million in the bank, thanks to an October 1997 IPO...sales last year were just $11.2 million, but its exclusive deal with search engine Excite is giving N2K (for "need to know") more visibility... revenue estimates are as high as $48 million this year. n2k.com/

Reel

...could pose a threat to Blockbuster...the Berkeley, Californiabased company has 35,000 movies available for rent on its site and sells about 85,000 videos a year through the Internet... but customers have to pay a hefty UPS charge ($15.50 for next-day air), and they must choose titles two to three nights in advance. reel.com /

N2K.com

Site founder Larry Rosen launched the Grammy-award-winning GRP Records, the first record company to digitally record on CDs.

Towerrecords.com

On average sells about 2.7 recordings per transaction.

Can segment adapt to Web? yes

Technologically savvy? yes

Products suited to the Web? yes

Can valueadded info be attached? yes

Player or victim? player

Bill Stephney, CEO of StepSun Music and cocreator of the rap group Public Enemy

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Perfect pitch

Discount Merchandiser

Bristol

Nov 1997

Authors: Duke Ratliff

Volume: 37

Issue: 11

Start Page: 73-74

Abstract:

The retail prerecorded music category is becoming increasingly dominated by such national chains as Tower Records, as well as mass merchandisers and the major consumer electronics chains. Using low-margin tactics and a high level of promotional activity, the industry heavies are driving many of the smaller, regional players out of the business. However, Compact Disc World is holding its own - some even say thriving - is this competitive marketplace where margins are declining and sales have been flat over the last 2-3 years. Company officials say that sales over the summer months increased by a double-digit rate, while overall industry sales grew by 2%-5%. The chain prides itself on offering a comprehensive selection of merchandise, and some 3 years ago it instituted a club program designed to compete head-on with other chains on price and to ensure that consumers in the market for music think of Compact Disc World.

Full Text:

Copyright MacFadden Women's Group Nov 1997 Compact Disc World, a regional specialty music chain, turns on the marketing juice to compete with the major prerecorded music retailers.

By most accounts, officials at Compact Disc World should be singing their last tune, something along the lines of The Party's Over.

The retail prerecorded music category is becoming increasingly dominated by such national chains as Tower Records, as well as mass merchandisers and the major consumer electronics chains. Using low-margin tactics and an amazingly high level of promotional activity, the industry heavies are driving many of the smaller, regional players out of business.

Not Compact Disc World. The South Plainfield, NJ-based prerecorded music retailer is holding its own-some say even thriving-in this super-competitive marketplace where margins are declining and sales have been at best flat over the last two to three years. Company officials say that sales over the summer months increased by a double-digit rate, while overall industry sales grew by a much smaller 2 to 5 percent rate.

"If you were going to bet that a chain was going to close down, who would you bet on?" asks Compact Disc World president David Lang. "It would probably be us, the local retailer."

Why is Compact Disc World performing so well? Simply by tuming the tables on the industry big boys. Officials at Compact Disc World are taking a page from some of the larger chains and playing hard ball in the intense prerecorded music market. Though its nine stores range in size from just 3,200 to 6,700 square feet, the chain prides itself on offering a comprehensive selection of merchandise. Then, almost three years ago, it instituted a "club" program designed to compete head-on with other chains on price and to ensure that consumers think of Compact Disc World when they are in the market for prerecorded compact discs or cassettes.

The difficulty for small regional chains is the aggressive stance taken on prerecorded music by the consumer electronicschains like Best Buy and Nobody Beats the Wiz. With consumer electronics sales off their highs of the late 1980s, these retailers are more often turning to prerecorded music to attract consumers into their outlets and they are using low-margin tactics to win the battle.

This puts the smaller players in a real bind. Like other specialty music retailers across the country, Compact Disc World found itself under attack as other merchants more aggressively used prerecorded music as a loss leader.

But, with some very good locations along New Jersey's major commercial roadways, officials at Compact Disc World, which registers approximately $20 million in annual sales, felt they could compete with these other retailers. The Club CD program requires consumers to pay a $12 annual membership charge. In return, they receive major discounts on all products in the store.

For example, club members pay $11.99 for newly released compact discs that carry suggested retail prices of $15.98 to $16.98. Catalogue titles that carry suggested prices of between $15.98 and $20 are normally offered at between 15 and 25 percent off that price to club members.

"They say that you've got to fight fire with fire and that's what we're doing, but just a little differently," Lang says. "We can't compete on selection with Borders' 60,000 music titles and it's very hard to compete on price with the electronics retailers that are using music to bring people into the store to sell them TV sets."

Lang wants to make a statement to the industry, especially in the crowded retail environment in northern New Jersey, where Compact Disc World competes with such chains as Tower Records, Nobody Beats The Wiz, Best Buy, Borders Music and Books and even Barnes & Noble.

"Our margin goals are very modest," Lang says. "What we're looking to do is increase our business and our market share."

In addition to price benefits, Club CD members also have the opportunity to preview any prerecorded titles before purchasing them. Compact Disc World also allows consumers to return any music item within 30 days with no questions asked.

"We not only give them the lowest price possible, but we give them a `buy it, try it' policy throughout the whole store," Lang says. He admits that the chain experiences a higher-than-average return level, but counters that the annual membership fee makes up for any expenses incurred. Also, the chain reserves the right to withdraw club memberships at any time.

With store personnel asking virtually every consumer whether they are club members and then explaining the benefits of the program, Compact Disc World has signed up more than 120,000 consumers to the program. Almost 90 percent of all the purchases made at Compact Disc World are by Club CD members.

"We get a lot of feedback from Club CD and we're experiencing a lot of customer satisfaction," Lang says. "People are very satisfied with it, and why shouldn't they be? They're getting great prices with hassle-free shopping"

In addition to helping to maintain customer loyalty and improve sales, Club CD also allows the chain to identify its clientele. "We think we know our customers as well as any retailer in the U.S.," Lang says. "When they join the club, they tell us who they are and where they live. We ask them things like what kind of music they like and what radio stations they listen to. Then we track their purchases."

Compact Disc World uses the information to strategically target club members with its direct mailings. One of the chain's goal is to stimulate consumers to come to the store, test the product and then, hopefully, make a purchase.

With all of the information gathered through the membership, chain officials can easily pinpoint appropriate consumers that are likely to be interested in specific titles. For instance, in August the company conducted a mailing to promote the release of Fleetwood Mac's reunion album The Dance. The retailer mailed the announcement to club members that had previously bought albums by the popular '70s band and to consumers that might be likely to buy the album-fans of the Eagles, for instance. The strategy paid off when the new Fleetwood Mac album was Compact Disc World's top seller during its debut week.

"The album was number one nationwide, but we were the only major chain in the metropolitan region to chart it number one," Lang said. "It even beat out Billy Joel [Greatest Hits] and New York is Billy Joel country."

Knowledge of its club members also helps the retailer to be more precise with its advertising. "We know the best radio station and whether the customers read print," Lang says. "We have all of this information and we analyze it constantly."

Even with all the emphasis on the price of new CDs, officials of the chain are not closing their eyes to accessories. Peripheral goods such as T-shirts, posters, hats, costume jewelry and unusual celebrity items such as Dennis Rodman lollipops and lava lamps command a large presence near the front of each store.

THE LATEST TUNES

Like the peripheral items which allow the store to make a fashionable, hip merchandise statement, the in-store music selection also emphasizes that the store is up to date. The chain strictly controls the audio environment The in-store radio play list is limited to just 18 titles each week. "The music is played to expose it to our customers as opposed to having clerks just play their favorite music all day long," Lang says. "We want to give consumers the information they need to make a choice."

Used CDs are another margin-enhancing opportunity for Compact Disc World. The company purchases already played CDs from customers for up to $5, depending on the artist and the album. The used CDs are sold for up to $10, though most sell in the $3-to-$5 range. Lang estimates that used CDs account for approximately 10 percent of the company's sales. "We want to take it up to about 12 percent and go no further," Lang says. "We don't want to be known primarily as a used CD store."

Used CDs appear to be a no-lose situation for both the retailer and the customer, Lang says. "There's little to no difference between a new and used CD," he says. "If handled properly, a CD sounds the same on its 1,000th play as it did on the first. So it offers the customer an opportunity to spend less money for a title that they might not normally buy.

They'll spend $7 for a CD when they might not spend $13."

Another product category recently entered by the retailer is DVD, the new movie-playing technology that manufacturers hope will eventually replace video. Compact Disc World, which Lang claims was once the leading laser disc retailer in New Jersey, has devoted space to DVD. "We believe in the DVD technology," Lang says. "We think it has a tremendous potential and we're trying to invest in it early." DM

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Music business makes waves on the Internet

Source: Advertising Age

Edition: Midwest region edition

Source Qualifier: Chicago

Date: Feb 16, 1998

Authors: Kim M Bayne

Volume: 69

Issue: 7

Start Page: 28

Abstract:

Increasing numbers of music marketers are tuning in to the Internet, finding that it is helping them reach audiences in both traditional and non-traditional ways. Garnering support for its Web presence, N2K Entertainment's Music Boulevard has developed strategic alliances with America Online, Excite, Netscape, AT&T WorldNet and PointCast. Meanwhile, Sony Music Entertainment recently announced it would implement a direct sales strategy on the Web.

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Music retailer finds commerce in communities

InfoWorld

Framingham

Feb 2, 1998

Authors: Eric Hall

Volume: 20

Issue: 5

Start Page: 46

Abstract:

N2K's Internet commerce site shows that if a niche market is given the information and tools it wants, then tremendous amounts of customer loyalty can be built. Although N2K's flagship site, Music Boulevard, was successful, its revenues were not astounding. N2K created genre-specific sites that are focused on the specific needs of the community. For example, Classical Insites has information that is of interest to the classical music fan, such as real-time audiocasts of live classical performances and a learning center, but it does not have a strong focus on selling products. N2K's strategy seems to be paying off, with the company reporting revenues of $3.6 million for the 3rd quarter of 1997, compared with the $450,000 earning reported in the same period in 1996. Each of the genre-specific Web sites refers back to the Music Boulevard Web site for information and specific recordings. The Music Boulevard site runs a highly customized version

of the Apache Web Server on a Sun Microsystems' Ultra server. The transaction server is another Sun Enterprise server, using EDI software written from scratch by N2K's developers.

Full Text:

Copyright InfoWorld Publications, Inc. Feb 2, 1998

N2K boosts traffic, customer loyalty with special-interest community sites

N2K HAS AN important lesson for all Internet-commerce sites interested in increasing revenues through community: "It's the customer, stupid!" Niche markets are, by definition, not typically well-served. N2K's site shows that if you can give a

niche market the information and tools that your members will want, then you can build tremendous amounts of customer loyalty.

N2K's flagship site is Music Boulevard (http://www.musicblvd .com), one of the largest music sales sites on the Internet. Music Boulevard was launched in August, 1995, by Telebase, an online commerce company, and it provides contentrich access to a wide amount of information that music fans want, such as artist biographies, tour schedules, music samples, and reviews. And, of course, there are provisions for fans to buy CDs, T-shirts, and other paraphernalia.

In 1996, Telebase merged with N2K, a provider of graphic design, packaging, and retailing services to the music industry. Following the merger, N2K began to explore ways to increase site visits and revenue.

Following old media's lead

Although Music Boulevard was somewhat successful, the revenues it was generating were by no means astounding. According to company documents filed with the SEC, Music Boulevard only did approximately $85,000 of business in the

first three months of its operation.

The company hit on an old-media concept that it thought might also work in the new-media world: radio's use of genre-specific formats.

"Radio stations aggregate listeners and fans around format,"said Jim Coane, president and chief operating officer at N2K. "If you look at how radio and the fan have evolved, there's a tremendous loyalty between fans and their favorite station. Our strategy is to create this same kind of loyalty through genre-specific music sites."

Essentially, N2K realized that it couldn't have a single site that adequately addressed the needs of all fans. Instead, the company created genre-specific sites that are focused on the specific needs of the community. This would allow fans of classical music to get detailed information that was appropriate to them, while also allowing jazz fanatics to get the same level of service.

Among the sites that N2K now produces are Classical Insites (http:// www.classicalinsites .com),Jazz Central Station (http://www.jazz centralstration.com), and Rocktropolis (http: //www.rocktropolis .com).

A focus on community For example, Classical Insites has a very large amount of information that is of interest to the classical music fan. Among the services that the sites provide are realtime audiocasts of classical performances, links to other classical music sites (such as orchestra and opera company sites), a RealAudio simulcast of New York's WQXR classical radio station, and a learning center. The site also has message boards and chat rooms, detailed artist biographies and discographies, and other elements one would expect to find in a community-centered site.

But what N2K's community sites do not have is just as important: namely, a strong focus on selling products. Rather than pushing CDs onto visitors, Classical Insites' focus is "to be able to respond to the instant-gratification sale" that naturally occurs through discourse and review,"and also to drive a more informed sale through community," Coane said.

This not-in-your-face attitude is what makes Classical Insites and its sister sites successful, according to Jonas Gray, director of Classical Insites. "Classical music is disappearing from schools and from music bins at record stores."

The classical music community seeks a refuge where it can meet to discuss artists and albums, and to learn about events in the field. Classical Insites aims to be just that.

"Without a doubt, this is the premiere classical music site on the Net,' Gray also said. "Visitors become much more like members of a special club."

Indeed, in early December, several of Classical Insites' frequent visitors flew to New York for a face-toface dinner.

The high level of loyalty engendered by the site has resulted in a substantial amount of sales. This in turn gives users a high level of comfort with N2K's product services.

"Most record stores don't have huge classical inventories, so it is much more practical and efficient to order the product online than to call in an order at the local record store,"Gray said."We have access to more than 200 Pavarotti titles, while most record stores only carry a dozen or so. Traditional retailers just cannot afford to keep lowturnover titles in stock."

Another positive side effect of the community focus is that Classical Insites has a highly focused audience, allowing N2K to sell advertising on the site at a premium.

All told, the strategy seems to be paying off, with N2K reporting revenues of $3.6 million for the third quarter of 1997, this is a substantial increase from the small $450,000 earning that was reported in the same period just one year ago.

Shared technology

Although N2K has a variety of community operations, each of which has a self-contained content and editorial management staff, the sites all share a common set of technology resources. For example, each of the genre-specific Web sites all refer back to the Music Boulevard Web site for information on specific recordings.

If you look at the link behind a Pavarotti record at Classical Insites, you will see a URL pointing back to Music Boulevard. The URL includes a CGI reference to a template, which tells Music Boulevard to present the album notes in a style that is appropriate to the Classical Insites site.

N2K PRESIDENT JIM COANE (left) and Classical Insites director Jonas Gray (right) have found that reaching out to the community makes a Web site more successful.

According to Jon Williams, managing director of technology at N2K Entertainment, templates include information for HTML elements such as background color, text color schemes, navigational objects, ad content, and even language.

The Music Boulevard Web site runs a highly customized version of the Apache Web Server on a Sun Microsystems' Ultra server. Its back-end database is an Oracle7 server running on another Sun server. The various community sites use whatever Web technology they choose for the presentation of their information, although each site must refer back to the Music Boulevard site for artist and discography notes.

The database content is built from a variety of sources: album titles and catalog numbers come from N2K's distribution partner, and information such as song titles, performers, composers, and other production notes are merged in from other sources. N2K then adds its own sound samples and the album art. Binary objects such as album covers and song samples are then kept on a RAID farm, and the database contains URL pointers to these objects.

Online ordering and fulfillment are also shared among the different sites. N2K has a single system that accepts and approves payments, and another system submits orders to the distribution partner via EDI, as needed. The transaction server is another Sun Enterprise server, using EDI software written from scratch by N2K's developers.

RealAudio encoders in New York provide analog-to-digital conversion for the different sites as needed. ISDN lines have been permanently installed at the major concert halls in New York, allowing N2K technicians to encode live performances on the spot and relay them to the server farm in Pennsylvania on the fly. For Classical Insites' simulcast of WQXR's radio shows, an antenna on the roof of N2K's New York headquarters pulls the signal out of the air, where it is encoded into RealAudio and then forwarded to the server farm for publishing.

Community pays off

Having proved its success, N2K is taking the concept of community to new markets. Recently the company announced that it would be establishing sites devoted to specific artists such as David Bowie (http://www.davidbowie.com) and Leonard Bernstein (http:// www.leonardbernstein.com).

N2K has also started its own record label and is beginning to sell its own products on the Web site, as well as through traditional retail channels. The company is also exploring technologies that allow users to download songs and cut their own CDs.

Regardless of these other ventures, N2K has an important lesson for other I-commerce sites. By targeting niche markets that are not being adequately served in mainstream markets, you can build high levels of customer loyalty to your site. This in turn will help to generate commerce in the form of transactions and advertising. But you must focus on the needs of the community, and not simply use their needs as a marketing vehicle.

Challenge: N2K needed to increase sales on Music Boulevard, its music sales Web site. Solution: N2K built a handful of community-oriented sites tailored specifically to the musical tastes of discrete audiences, such as classical, jazz, and rock listeners.

Benefit: Because the sites address the needs of the communities that they serve, visitors do not feel as if they are being "sold to,"and then develop a strong sense of loyalty, often visiting the site several times per day. This in turn has led to a substantial increase in sales, while opening additional revenue opportunities in highly targeted advertising and sponsorship deals.