For music, the next front is Europe

Online music retailers appear to be looking toward Europe for the near-term future of their businesses.

This week, brick-and-mortar powerhouse Tower Records and online firm CDnow announced significant boosts to their continental Net businesses. Tower plans to expand its services this fall to be available in "six languages, 150 different currencies, and backed up by a global distribution network from over 40 locations."

CDnow has launched CDnow Europe, with a European shipping center serving more than 37 countries, aimed at speeding delivery and lowering costs of shipping European titles to Europe and the Middle East. CDnow also is offering its service in nine languages.

The new initiative follows CDnow's deal in April in which it became the exclusive music retailer for Lycos Bertelsmann, the European affiliate of portal Lycos. (See related story)

Online music competitor Music Boulevard offers its service in five languages and has a distribution hub in the Netherlands, as well as having global marketing deals with AOL Europe and MTV Europe, among others.

"Generating market share among European consumers is a central focus for N2K," says a message on Music Boulevard parent N2K's site.

Looking outside the United States is nothing new for online music retailers, but loyal users in Europe could prove especially important as competition intensifies and profits become more elusive.

The online music players "have to concentrate on Europe," said Mark Hardie, a senior analyst with Forrester Research. "Twenty percent of music sales right now is coming from outside the United States. So the question is, do you want to let another CDnow-esque player come in and take that market away?"

Plus, Hardie noted, "There is no significant cost to do it."

"CDnow has to keep moving at pace because they're in a brand race," he said, adding that Tower's online presence has yet to really take off.

Analyst Kevin Wagner of investment bank Adams Harkness & Hill cited different numbers for European market share, but he agreed with the overall outlook.

"With the European market representing about one-third of global music sales as of 1997, this clearly is another area where there is a large market potential for CDnow," Wagner said. "CDnow needs to build brand momentum."

Moreover, as CDnow president and cofounder Jason Olim pointed out: "Today, you have to be selling European music to European users, because that's what they're buying."

Olim noted that CDnow's move now allows it to deliver its 100,000 foreign titles--most of which are European, with some Japanese and "world" titles thrown in for good measure--faster and with lower shipping costs.

"It used to take a couple of weeks and cost $10, now it costs $4.97 and it can be delivered in a day," Olim said.

Online music firms have to contend with extremely low margins for sales. Brick-and-mortar retailers face the same difficulty, but the bigger players have established brands already, whereas the online music space still has room for a shake-out. For example, though CDnow and Music Boulevard are the best-known brands online right now, Net bookseller Amazon.com launched a music store in June, and a month later replaced CDnow as the exclusive retailer for Net radio firm Spinner.

Online retailers take roughly $1 to $1.50 per sale of a hit CD, when the price point is around $16 to $17, Hardie said, noting that the equation is a little bit better for older CDs. The rest of the profit goes mainly to the record companies, with some also going to distributors such as Valley Media and some paying royalties to the artists. As the Net players compete, they often will offer a hit CD for a sale price, sometimes as low as $10 or even less, along with specials such as free shipping for buying a certain number of CDs.

When the firms do that, "they're probably not making anything at all," Hardie said. "They want to get you in to buy that one hit CD and hopefully take two more at the regular price--it's all about volume."

It's also about what firms have to spend to gain customers, analyst Wagner noted.

"Initially, these companies have to spend a lot of money to get customers. When you do so, initially it costs quite a lot to get those customers. But once you do that and get that brand momentum going, your customer acquisition costs fall," he said, and that paves the way toward profitability.

With volume and brand momentum being the names of the game, the retailers have to expand outside the United States to grab market share on a global level.

Hardie also warned that along with the tough competition already out there in the Net, other players are looking to online music retailing as a revenue source. The relatively low barrier to entry could pose a threat to the current roster.

A possible contender to grab market share domestically is local radio stations, which are beginning to look to the Web for broadcasting as well as building community and eventually, as an adjunct revenue stream. He said that since there is no significant investment necessary to add a button on a site for retailing, "what's to stop all the radio stations--or [distibutor] Valley, for that matter--from selling CDs?" he said.

Wagner pointed to Japan as the next big marketplace for online music sales, and noted that N2K already is building a strong presence there through a deal with Japanese music retail chain Shinseido. He predicted that CDnow will look to that market next.

"We're looking at all the other continents," CDnow's Olim said. "We're looking to build a truly global distribution network."