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N2K downside leads to downgrade

Capping one of its worst weeks financially, shares of the online music retailer slip more than 16 percent following an analyst's dowgrade.

Capping what already was one of the company's worst weeks financially, shares of N2K closed down more than 13 percent after an influential analyst downgraded the stock from "buy" to "neutral."

The online music retailer, which has lost more than 40 percent of its value this week alone, closed down .8125 or 13.54 percent at 5.187 after Bear Stearns analyst Scott Ehrens revised his rating of the company.

The recommendation comes as online retailers--particularly those hawking music goods--are struggling with razor-thin margins. CDnow, which also sells music via the Net, saw its stock slide about 15 percent this week. Since May, both companies have watched their stock plummet by more than 70 percent. CDnow traded down earlier in the day before closing unchanged at 8.

While the Music sales don't sing
online stocks of many online retailers have declined over the past few months, analysts said that music sites are experiencing additional problems unique to their industry.

"Being a music retailer is a very challenging business," said Mark Hardie, a senior analyst covering entertainment at Forrester Research.

As brick-and-mortar retailing giants such as Wal-Mart and Best Buy have moved aggressively into music sales, they have squeezed margins so thin that music stores have had a tough time competing, he explained.

"That's the business that [N2K's] Music Boulevard is in," Hardie said.

Over the past few months, it has become clear to investors that online music retailers will have to tolerate extremely low margins in order to drive traffic to their sites, added Lauren Cooks Levitan, a financial analyst at Banc Boston Robertson Stephens.

"This has always been a category that we've had misgivings about in terms of the ability for an e-tailer in this space to achieve profitability," Cooks Levitan said. "I don't expect that the promotional level is going to flow down by the holiday season."

Hardie said that N2K has been hindered further by its lack of focus. In addition to selling CDs, the company also offers "music channels" with content about particular genres, a record label that signs musicians, and a technology for distributing music digitally over the Web.

"My business school training says, 'focus,'" Hardie said. "I think they spread themselves too thin."

At the same time that Bear Stearns's Ehrens downgraded N2K, the analyst upgraded, the online bookseller that entered the market for music sales in June. Amazon closed up 7.625, or 7.43 percent at 110.25.

Analyst Cooks Levitan said that, because it has revenues from other retail spaces to fall back on, Amazon is in a stronger position to capture the market for online music sales.

"They can afford to withstand price battles, so they can ride that out a little better than someone whose life is dependent on the music business," she said.