CDNow Sales and Losses Hit High Notes

If CDNow, Inc. (Nasdaq: CDNW) executives were to play a tune to summarize their latest financial statement, it could be “Both Sides Now,” by Joni Mitchell.

On one side, the company announced that revenues spiked up 128% in the first quarter to $22.8 million (US$). On the flip side was the news that losses increased to $19.1 million for the quarter, up from $9.3 million from the first quarter of 1998. This pattern of rising revenues, accompanied by increased losses, has become a familiar song, being sung often these days by many of the giant online retailers.

The company says that as a result of the recently completed merger with N2K, it expects to save over $20 million in costs in 1999. The end result, they say, is an online music emporium with a broadened reach. Its two online stores, and Music Boulevard, have attracted over 2 million visitors since their inceptions, the company says, making it the third most visited online retailer. That figure is up from 600,000 visitors in the corresponding 1998 period.

CDNow chairman of the board Joe Diamond said the company has made a number of important moves in the last year, including the “biggest merger of equals in cyberspace history.”

“CDNow has clearly emerged as the vertical e-commerce leader with 2 million customers,” Diamond said, “as well as a major promotional vehicle for artists, music and related products.”

Facing the Music

While revenues are up, CDNow, like its 1000 lb. gorilla rival, is facing growing pains. Analysts had predicted losses for the quarter to exceed $1.00 a share. They did reach 96 cents a share, but the ammortization of acquisition costs reduced the figure to 78 cents a share.

CDNow’s stock has slipped over 30% in the last year. Amazon has had a well-chronicled slide of over 25% in the last three weeks, losing some $9.5 billion in value. Investors are obviously jittery about increased promotional and spending costs associated with selling music over the Internet.

Despite these understandable concerns, the online sales of music are expected to increase dramatically in the coming years. Some expect sales to skyrocket to nearly $4 billion by the year 2005, up from $28 million in 1997. Planning to capitalize on these expectations, Seagram Corp., parent of Universal Music, and German giant Bertelsmann, the world’s third-largest media company, announced last month that they intend to form an alliance to create music-selling Internet sites.

Not Standing Still

CDNow is by no means standing still. The company launched a new TV advertising campaign in February, beginning with the Grammy awards. Later this month it plans to open its new store, which combines the elements of CDNow and Music Boulevard. The new store will have 500,000 music products and sound samples, daily news, reviews, features and exclusive interviews. The company also intends to offer secured digital music distribution to customers later this year.

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