N2K jockeys for key partners in music space

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N2K, continuing a flurry of deals, is said to be close to signing an exclusive alliance with a major search engine. Word of that deal surfaced less than a week after N2K nailed a three-year, $18 million partnership, making its Music Boulevard site the exclusive music retailer on key areas of America Online.

The AOL alliance is a critical one for N2K, whose flagship music news and retail site Music Boulevard is battling in a category dominated by CDnow, which has 33% of the online music retail market, more than twice that of any of its competitors, according to Jupiter Communications. Jupiter predicts online music revenues will grow to $2.8 billion in 2002 from a projected $71 million in 1997.

N2K'S BUSINESS MODEL

"It's a validation of our business model," said Jon Diamond, vice chairman at N2K. The company's music network, which includes content sites like Jazz Central Station and Rocktropolis, events and Music Boulevard's retail space, "was key to AOL selecting us."

"I think if you look at AOL--we have a pretty clear strategy," said Robert Pittman, CEO of AOL Networks. "We are the mall and we let other folks be the stores."

What AOL found attractive about N2K, Mr. Pittman added, was that it relied on the Web for its business, rather than using it to supplement retail store sales.

Under the terms of the deal, N2K will pay AOL a minimum of $18 million during three years, with $12 million to be paid by Dec. 1. Ad revenue will be shared between the two companies.

In exchange, Music Boulevard is the exclusive music retailer within AOL's MusicSpace and in applicable areas of AOL.com and the proprietary service.

SCRUTINIZING THE DEAL

Music Boulevard competitor Tower Records will continue its longstanding storefront in AOL's mall and as the exclusive retailer in entertainment area the Hub, an AOL joint venture. The recent Hub/Tower deal was basically a real estate barter with no fees exchanged.

But some analysts are skeptical about the value of the AOL/N2K alliance.

"Basically, it's an ad buy," said David Simons, managing director at Digital Video Systems, an investment research company.

Mr. Simons questioned whether N2K, which is filing for an initial public offering, is on a buying spree, trying to drive up future stock shares. When N2K filed for its IPO, it reported a net loss of $4.5 million for the first quarter, with revenues of about $1 million. The notion is that with N2K on AOL, "How can they miss?" asked Mr. Simons.

SUPERBOWL ANALOGY

When Amazon.com announced it was spending $19 million to be the exclusive bookseller on AOL.com, the stock took off, Mr. Simons pointed out. "By the same logic, the companies that buy spots on the Super Bowl should have stock shares that go up."

Mr. Pittman disagreed with the Super Bowl analogy, citing that advertisers that receive preferred positioning from the networks in ad buys receive favorable press.

While Jupiter analyst Patrick Keane conceded that driving up stock is obviously part of the deal, he considers this alliance as more than just advertising.

"A lot of people are more inclined to make purchases on AOL than the Web," Mr. Keane said. "It's a service they've already given their credit card to."

KEEPING PACE WITH CDNOW

In addition, Mr. Keane said, N2K needs to keep pace with CDnow, which has an exclusive retail arrangement with Yahoo!, as well as with many of the major and independent music sites and record labels. And part of that is "being able to align with arguably the largest brand online," he said of AOL.

Music Boulevard., which reports 8 million monthly page views, has multiple barter and transaction fee alliances, including deals with MTV Networks, WebTV, AT&T, @Home and numerous independent sites.

However, the bigger challenge that faces N2K and its competitors may be getting the music industry to accept digital downloads as an acceptable delivery system, and waiting for the technology to make it worthwhile.

SLOW DOWNLOADS A CHALLENGE

N2K has created its own music label with singles available through its encoded music online delivery system that uses Liquid Audio software. But so far, downloads take up to 16 minutes for a single using a standard 28.8 modem. Selection is also limited because most major music labels and artists are afraid of pirating and have held back from selling their wares online.

"What N2K is doing is admirable; it might ultimately be successful," Mr. Simons said. "But deeply entrenched industries--like the multimillion-dollar music industry--don't change overnight."

Copyright September 1997, Crain Communications Inc.

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