The Beat Goes On - trends in online music retailing - Statistical Data Included

Brandweek, Oct 18, 1999 by Eric Schmuckler

Music was an early e-commerce hit, but its growth has only just begun.

Do you know how many holes it takes to fill the Albert Hall? If you're the type of person who can I.D. this oblique Beatles reference, you may well be one of the 7 million U.S. customers who visit online music sites. Music retail online will rake in an estimated $300 million in sales this year, according to Jupiter Communications. That equals a percent or two of domestic music sales of $20 billion, meaning bricks-and-mortar types like Tower Records and Musicland aren't exactly quaking in their boots. But Jupiter projects online music will hit $2.6 billion in 2003, and you don't need a weatherman to know which way the wind is blowing.

Big growth in this category is a given. But how will it develop? Currently, the business is dominated by two giants with diametrically opposed models: the mall-like Amazon and the vertically driven CDNow. Other online giants are sure to jump into the fray: Barnesandnoble.com, for instance, already has. And that's just the big guys. Altavista offers links to some 75 music retailers, from used CD shops and reissue specialists to custom CD-burners.

While online CD sales have yet to soar, Jupiter analyst Ken Cassar believes they will follow the model set by the Net's e-commerce breakthrough segment, books. "Both can be "evaluated equally well from a Web site," he says. "There's no need to touch. [In fact, online stores can offer more info in the form of a wider array of sound clips.] Deep catalog is a benefit. You have the ability to cross-promote, to learn what your customers like and make recommendations. And there's the price paradigm"--that is, hefty discounting that is great for attracting customers if not generating profits.

Cassar also sees "a distinct separation of the really, really big and the really, really small at the expense of the middle. [Middling] companies, with sales between $5 million and $50 million, will be acquired by the big players, like CDNow, or big companies like Virgin or Musicland or someone who wants to get into this space. I don't think the Web will support ten merchants in every category."

The big boys are running way ahead of the pack. Although it doesn't break out figures, Amazon will gross an estimated $150-200 million in music this year, according to Mark Hardie of Forrester Research; publicly held CDNow is on track to surpass $150 million. Unless you're a VC examining the books of the smaller hopefuls, it's tough to get a handle how much business the second-tier players are doing; Cassar figures none of them tops $10 million. According to data from Media Metrix on unduplicated visits in August, the most recent month available, the music-centric sites that popped were CDNow (4.3 million), Tunes.com (1.2 million), Ultimate Band List (1.2 million), ARTISTdirect (800,000) and Tower (300,000). Broader Web merchants including Buy.com, Spree and Best Buy also ranked, but music sales can't be broken out.

Greg Hart, Amazon's product manager, music, believes the company's continued dominance is a matter of user feedback and tweaking. "When we launched the site in June '98, we invited our customers to help shape it," he says. "For example, they wanted help being introduced to genres that are intimidating--classical, jazz, international. So every month we feature a title from each genre, with an essay on why it's a great place to get started. They can hear streamed pieces of songs interspersed with commentary by our editors."

Features like this can help distinguish the music sites, which tend to become homogenized in selection and pricing since many of them order and ship through the same big wholesalers, such as Valley Music. Editorial extras, which may be homegrown or outsourced, include detailed track information on albums, reviews, interviews, news, contests, chat, links, webcasts and so on.

"Content is key," says Hart. "It helps customers make an informed shopping decision."

Will music get lost in the increasingly big tent that is Amazon? "We don't recommend toasters, but we do recommend other consumer electronics like Rio players [which play MP3 files] and DiscMans," notes Hart.

"Anything that can add value, that you can do with one click, is useful."

At the other end of the spectrum is CDNow. "There are two [shopping] models," says founder/CEO Jason Olim. "You might go to Wal-Mart or you might go to Tower Records. ... The hardcore fan isn't going to go to Wal-Mart. We'll always add things-- tchotchkes, music books, custom compilations--but we're vertical."

For heaven's sake, though, don't label CDNow a retailer; since merging last year with N2K's Music Boulevard, the once-catalog driven site is increasingly focused on content.

"We're a music destination," Olim insists. "Our business is connecting people to music, not selling them products. ... We've got the best music news on the Web. We broke the story about which music would be in the new round of Gap ads. That's why they advertise on us now--after they stopped yelling at us."