CDNow Ad Department Axed

Bertelsmann AG announced Wednesday that it is eliminating 55 jobs at subsidiary CDNow, in a move that will eliminate the entire advertising sales function at the online music site.

The move makes sense for Bertelsmann, according to industry observers. Before being purchased by the German media giant, CDNow had turned to selling advertising space because it needed the revenue stream to supplement the low margins on CDs.

According to Bertelsmann, promotional efforts at CDNow will now be focused on co-marketing deals.

"In order to be competitive and to offer the best choice and the best service for our customers at the best price, we are always looking at how to improve operations," said Andreas Schmidt, president and chief executive officer of Bertelsmann eCommerce Group (BeCG).

Making Music

Bertelsmann, which also owns the BMG record label, has been quick to embrace the possibilities of distributing music in both traditional and digital forms online. In addition to its approximately US$117 million purchase of CDNow in July, the company has also partnered with digital download service Napster.

In November, Bertelsmann and Napster announced they had inked an agreement to create a secure membership-based online music subscription service. The first sign of that alliance was seen last month when Napster unveiled a site upgrade that included a link to e-tail site CDNow.

Still, it is Bertelsmann's association with Napster that could prove troublesome for CDNow. Morningstar.com analyst David Kathman told the E-Commerce Times that if "Napster looks like the wave of the future, CDNow could be left withering on the vine."

Top of the Heap

However, at least one analyst believes that CDNow's fortunes are on an upswing. CDNow is widely viewed as the No. 1 seller of music online, and consistently ranks among the top five most visited Web properties.

Even more astounding, according to Yankee Group research analyst Paul Ritter, is that the company is hitting those marks without spending a lot on advertising.

"I don't see a great deal of advertising for CDNow on TV or the radio, even in print, but yet their traffic numbers are still high, which means the money that had been spent on brand building has had some residual effect that's continuing to drive visitor traffic," Ritter said.

Day the Music Died

Still, many would argue that digital downloads have taken money out of the pockets of online and offline retailers alike. Even Amazon.com has reported slowing growth in its core business of music, books and videos.

Last month, eMusic laid off about a third of its staff, in a move that chief executive officer Gene Hoffman blamed on "the widespread illegal distribution of digital music."

Hoffman's concerns were backed up by a study released in November by PC Data Online, which reported that Napster users make few online music purchases. Additionally, a report released in October by the Pew Internet & American Life project revealed that most Americans do not believe that downloading music for free is theft.