Really big: A merger of CDnow and Music Boulevard would put 45% of the online music market under one company. POWERFUL RETAILERS ADD MORE MUSCLE: CONSOLIDATION EXTENDS TO $3.3 BIL ONLINE MUSIC AND BOOK INDUSTRIES

With thousands of retailers in business on the Web, only a few are making any real money. Among those are online sellers of music and books, according to industry reports. Jupiter Communications estimates online sales of books will reach $2.2 billion by 2002 and online sales of music $1.15 billion. In the past month, leading retailers in these categories have begun to consolidate or are talking about merging into more powerful retail sites. For instance, earlier this month, German media giant Bertelsmann agreed to pay for a 50% stake in Barnes & Noble's Web subsidiary barnesandnoble.com. Under the terms of the deal, Bertelsmann and Barnes & Noble will each invest $100 million in the online bookstore, which launched in 1997 with an exclusive deal on America Online, and then on the Web. Bertelsmann also said it's still going forward with plans to introduce Books Online, which launches in November in France, Germany, the Netherlands, Spain and the UK. "Most of what this does is give Barnes & Noble a fighting chance in the European market," says Nicole Vanderbilt, senior analyst at Jupiter Communications. "That was anyone's game to win. I don't think it'll have a huge impact in the U.S. market." AMAZON.COM STILL STRONG In April, Amazon.com made its international move by purchasing a UK site called Bookpages and a German site called ABC Bucherdienst, both of which it recently relaunched as Amazon.com branded sites in Europe. And while the Bertelsmann/Barnes & Noble deal is important, it's not strong enough to bring down Amazon.com, Ms. Vanderbilt says. Bertelsmann publicly states it will keep its direct book clubs and publishing houses -- which include Bantam, Doubleday Dell and Random House -- at arm's length with Books Online or barnesandnoble.com, she says. Bertelsmann and Barnes & Noble also said they would go forward later this year with plans for an initial public offering for barnesandnoble.com, which has been unprofitable to date. It generated $14.9 million for the fiscal year ended Jan. 31, 1998. Barnes & Noble projects its revenue will exceed $3.2 billion in the current fiscal year, while sales for the online subsidiary are estimated to reach $65 million. Trying to boost market share, last July Barnes & Noble awarded the $38 million ad account for barnesandnoble.com to TBWA Chiat/Day, New York, after Weiss, Whitten, Stagliano had handled the business for less than a year. EXCLUSIVE PARTNERSHIPS The bookseller spent its first year locking down exclusive partnerships. In the fall of 1997, it secured exclusive retail space on Lycos (in a deal analysts estimated to be worth $15 million in revenue over three years for Lycos). Other retail partners include Disney Online, MSNBC, Excite's WebCrawler and Wired Digital's HotBot. Amazon.com, which got a two-year jump-start on barnesandnoble.com, has also been in an aggressive expansion mode. Agency of record Foote, Cone & Belding, San Francisco, late last year broke TV spots for the bookseller, a rarity at the time for an Internet company. ONLINE RETAIL SPACE It's also locked down exclusive space on AltaVista, Excite, Yahoo!, and America Online's AOL.com and its NetFind search guide. Earlier this year, Amazon.com expanded its merchandise offerings by selling music titles for the first time. Steve Riggio, CEO of barnesandnoble.com, said it would start selling video and music titles early in `99. "The focus will be on music and video collections that resonate with book lovers," Mr. Riggio said, adding that it wouldn't be going after the mass music market as much as the niche classics market. These moves come as leading music sites are thinking about consolidating. CDnow and N2K's Music Boulevard recently acknowledged that they're in discussions to merge, but won't comment further. Merged, the two retail sites would cover 45% of the online market, according to industry estimates. "I think it's a smart move on their part," Ms. Vanderbilt says. "Increasingly, this market is becoming a game for who can gain the biggest market share." She adds: "I think it's wise competing in the face of Amazon and Tower Records -- two companies that are starting to spend more money and invest resources into their online presence." The question remains whether CDnow and N2K can establish a unified brand. CDnow says it has 569,000 customers, while N2K counts 522,000 customers. CDnow, founded by twins Jason and Matthew Olim, attracts users with targeting and competitive pricing, such as the recently launched MyCDnow personalized service. CDnow draws music reviews and stories from MTV and Rolling Stone, with exclusive rights agreements designed to connect the artists with their fans. A strong believer in offline advertising to support its Web presence, the music retailer has committed $22.5 million to MTV and sister station VH1 over the next three years. CDnow was the exclusive music retailer of MTV's "Music Video Awards," running TV and radio commercials from Hampel/Stefanides, New York, before and during the show. AFFILIATE-SITE DISTRIBUTION Another key to its strategy is distribution through affiliate sites. The CDnow Cosmic Credit program gives home page users up to 15% commissions on purchases made through their links. CDnow says it has 100,000 members in its affiliate program. "Our philosophy is, where music is, we want to have our brand," says Rod Parker, senior VP-marketing and product management at CDnow. N2K isn't far behind CDnow. It generated $10 million in the second quarter ended June 30. David Pakman, VP-business and product development at N2K, says the company estimates it will earn $50 million in revenue by the end of the year. In February, N2K hired Kirshenbaum Bond & Partners, New York, to produce a $5 million to $10 million ad campaign. N2K partners with more than 250 Web sites such as ABC.com, Disney.com, Infoseek Corp. and MSNBC. Its affiliate program has 7,000 members. SYNDICATED CONTENT N2K also syndicates its content, publishing daily music news on Excite and other sites. However, Mr. Pakman believes N2K's strength is being vertically integrated. In addition to Music Boulevard, it has three other genre-specific music sites: Rocktropolis.com, JazzCentralStation.com and ClassicalInsites.com. All are community-based sites, where music fans can participate in chat sessions, read articles and listen to Webcasts. Even though CDnow and N2K each invested a lot of money and effort into building separate brands, Ms. Vanderbilt thinks they'd work well as a merged company. "The Olim brothers bring a direct marketing mind-set" to the union, she says. While N2K's "roots are in music and they're trying to find out how to best monetize that. . . . I think the mix of those two mind-sets could be very powerful."

Really big: A merger of CDnow and Music Boulevard would put 45% of the online music market under one company. POWERFUL RETAILERS ADD MORE MUSCLE: CONSOLIDATION EXTENDS TO $3.3 BIL ONLINE MUSIC AND BOOK INDUSTRIES

Featured Stories