Amazon (AMZN) is kicking off its foray into the music business today with a pretty cool idea. It's not just going to offer its 2.4 million bookworm customers the latest ballads from Celine Dion, but also tracks from your local bar band.
"Garage bands with their own CDs can send us five copies, and we'll warehouse them," said David Risher, senior vice president at Amazon. The bands will get paid as the CDs are sold and Amazon will request more if the band starts making it big or the CDs sell out. This is similar to its program allowing small presses or booksellers to pay a stocking fee (less than US$100) to get their titles online.
But make no mistake, the leader of online booksellers is thinking big for its push into music, as well it should. The Seattle-based company, with $87 million in sales during the first quarter of this year, and a loss of $27.6 million last year, faces well-established competition like online music sellers CDnow Inc. (CDNW) and Music Boulevard, a unit of N2K Inc. (NTKI), as well as recent entries like K-tel and Borders.
With music sales on the Net projected to rise from about $300 million this year to $2.5 billion in 2002, everyone is getting into the biz, and analysts and industry executives say Amazon.com will definitely get a piece of the market. But few would speculate as to whether the company can sell tons of music to its big reading-customer base. Amazon may find differentiating itself from its competitors difficult.
"I think that Amazon will be a major player. They are going into this with very aggressive pricing," said Genni Combes, an analyst at Hambrecht & Quist. Combes also pointed out that the cost of acquiring a customer for most companies, through partnerships, is around $25 a head. She said the company can "milk the two-million customer base by providing more products." But she was hesitant to predict a winner. "I think time will tell."
Analysts saw Amazon's musical move as a logical step, but not necessarily a killer one. "Amazon builds close one-to-one relationships with their customers. There's no reason why they can't offer an expanded group of products and services," said Allen Weiner, analyst at DataQuest.
Melissa Bane of the Yankee Group said that if Amazon can successfully port their book customers over to music, they will do quite well. But that's a big if. "Whether that means Amazon can sell you a CD you would not have bought remains to be seen," she said.
Regardless, Amazon's new music site has been in the making for quite some time.
"The No. 1 request we've gotten from our customers is to add music," said Risher.
And so, Amazon busted out around 100,000 CDs for sale, along with 225,000 song samples and a big database of original reviews and other content weighing in at about 750,000 words. The new site features browsing by genre, biographies, musical influences, related artist and book links, recommendations, music charts, and a search-by-song-title feature. There will be discounting as well -- CDs will be 10 percent to 40 percent off retail, with top sellers sold at 30 percent off.
By comparison, CDnow's founder and president Jason Olim says that his site offers 250,000 music products.
But Risher says Amazon's site is still evolving, and added, "We are at such a different scale from CDnow and N2K." CDnow's net sales last year were about $17.4 million, with losses at around $10.8 million, and N2K held about 12 percent of the online music market share last year with revenues of $11.3 million and a net loss of $28.7 million
Olim begs to differ. He says that, in the last two years, his company has maintained 33 percent market share and that the CDnow brand will give them the edge.
"Our goal is to have someone to think about CDnow when they think about music," he said. "This is really a race [between] three different business models. You have the department store approach, Amazon -- a Sears, or a Macy's that sells a variety of different products. You have N2K -- the entertainment model. Then you have us -- we are a category killer, the Home Depot or Toys R Us, best focused." Olim also cited CDnow's deals with MTV Networks, and with Rolling Stone and College Music Journal for content, as well as the Grammies' and VH-1's music awards as evidence that the company will maintain the industry lead.
N2K also refuses to back down. "It would be foolish to underestimate Amazon," said N2K's president Jim Coane. "But creating a compelling experience for books online is different than creating a compelling experience for music online." He said Music Boulevard's planned launch of European and Japanese sites this summer will triple the company's online catalog to more than 600,000 titles.
Meanwhile, Amazon.com is forging ahead with its additional expansion plans into the movies. In April, the company announced the acquisition of Internet Movie Database Ltd. as a possible prelude to online sales of videos. The company also acquired two European booksellers, for a grand total of about $55 million.
Reuters contributed to this report.
