RealTime IT News

Competition on the Rise as Net Music Sales Take Off

Music sales over the Internet are rising rapidly, but then again, so is the competition, according to a new industry report.

Cowles/Simba Information's Multimedia Entertainment & Technology Report newsletter estimates that revenue for the top five online music retailers jumped 141.9% from $21.5 million in 1996 to $52 million in 1997.

However, several new launches have resulted in an increasingly competitive environment. As a result, some of these companies have turned large sums of money raised through initial public offerings over to content providers and search engines for exposure in online malls and shopping areas, the report said.

While these companies are convinced that expensive partnerships are necessary for long-term survival, others believe the money spent on such fees is a waste, the newsletter said.

CDnow and N2K, the two leaders in the online music retailing market in terms of 1997 revenue ($15 million and $12.5 million respectively), both struck exclusive partnership deals with major search engines or content providers.

CDnow will pay Yahoo! minimum fees of $3.9 million for exclusive banner and keyword placement on music-related sites within Yahoo! metro sites and My Yahoo! Also, in September, CDnow signed a two-year, $4.5-million agreement with Excite to be the designated online music retailer within Excite's WebCrawler search engine.

N2K has signed similar deals, including a two-year, $18 million contract with America Online to be the exclusive online music retailer within the Music Channel on AOL, as well as a permanent banner and link on AOL's Shopping Channel. In addition, the company signed a $3.8 million deal to develop a co- branded site with Excite, and two $4 million agreements with Netscape.

In each case, these multimillion dollar deals were or will be financed with capital raised from IPOs, the newsletter said.

Jim Coane, president/COO of N2K, believes that the key factor to differentiate an online music service is the ability to build a brand on the Web, where the major portals are locked up in exclusive or premier deals.

"Those [deals] are an effective, preemptive barrier to entry for competition. Brand is a critical success factor, and it may be too late for small entrepreneurs to capture the mindshare necessary," he was quoted as saying.

Tower Records is the Web market's fourth largest music service with an estimated $8 million in revenue, but currently does not have any exclusive partnerships with content providers.

"Partnerships are good and generate exposure and traffic, but at what cost? It remains to be seen whether that strategy will win out," said Mike Farrace, vice president of publishing and electronic media for Tower. "Leveraging existing media is the difference for us. We spent [advertising dollars] around Christmas on spot buys."