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Will CDs follow Amazon's lead?

As companies like CDnow offer steep price cuts to stay competitive, the online retail music industry may go the way of the digital book market.

3 min read
In the perennial battle to gain market share, Net retailers have tried everything from innovative alliances to advertising on other media. But nothing seems to speak to Netizens like a good old-fashioned price cut.

Or so hopes CDnow, which has lowered prices Music sales don't sing online up to 30 percent. The Net music retailer's aggressive move is reminiscent of tactics employed in the book world by Amazon.com--and, if both companies ultimately prove successful, the business strategy could emerge as the model for electronic commerce in the entertainment retail industry and beyond.

"In general, it's a good strategy," said Patrick Keane, an analyst with Jupiter Communications. "There are a lot of people beyond the early adopters who need sort of a push in the right direction in terms of buying anything online."

Lower prices are often a necessity for catalog retailers to offset shipping charges and for a variety of other reasons. For online companies, such reductions are even more important to lure customers who are unfamiliar with their brand names.

Online retailers have resorted to these guerrilla tactics to keep themselves afloat under increasing pressure from their traditional predecessors, which are flocking to the Net in greater numbers as the general public becomes more comfortable with e-commerce. The clearest example of this is the online book war that has pit the Amazons of the world against real-world archrivals like Barnes & Noble. In November, during the heated holiday season, Amazon announced discounts of 89 percent on what it called "special value books" just one day after Barnes & Noble offered 88 percent off a similar category on its Web site.

Keane said this trend would only expand further as the Web continues to establish itself as a legitimate retail marketplace. "Price is certainly a type of differentiation--and it's the easiest in terms of a way to stand out among competitors," he noted. "Price is definitely going to be a real determining factor in terms of commodity items like books and CDs."

This latest move by CDnow could serve as a bridge for the Amazon strategy to the music business and other markets.

"The new prices are customer-driven," Rod Parker, senior vice president of marketing and product management, said in a statement. "As an Internet store, our customers are able to determine what the top hits are instead of having to rely on a third party. This interactivity ensures that they receive the best prices on their favorite albums."

So far, no music site has managed to grab a solid concentration of eyeballs the way Amazon has with books. And analysts point out that Net music sales so far make up only a tiny fraction of overall music sales, estimated at about $40 billion per year.

But that may change as some strategic partnerships begin to bear fruit. CDnow has struck some deals with high-profile Net companies, including Yahoo, GeoCities, and Time Warner in its Road Runner cable Net access service.

Whether the partner offers a link to related music, as Yahoo does, or offers a small commission, as GeoCities provides with its community members, CDnow is attempting to make buying music a ubiquitous part of life in cyberspace. And others are looking to cash in on the same idea.

"CDnow was the first out of the gate in this industry, but N2K [which operates the Music Boulevard store as well as music content sites such as Jazz Central Station and Rocktropolis] has gained a lot of ground and is leveling the playing field," Keane said. "This is a direct way for CDnow to re-up the ante and be even more competitive."

The question is, will CDnow's marketing deals and its new price cuts lead to profits, a critical factor in its plans to take the company public? Could price cuts be Net music retailers' "killer app"?

"It's a good move for [CDnow]," Keane said. "I think that as people start buying more online and prices get lower, it will be the factor that makes people wait a day to buy online rather than impulse-buy in a store."