RealTime IT News

CDNow Founder Upbeat on Future Prospects

Responding to reports that it faces a dismal future, CDNow, the pioneering online music seller, went on the offensive Thursday.

"The perception in the marketplace is profoundly wrong. My company will be able to get to profitability, and I've got more to leverage and build on than anyone you can think of," said Jason Olim, CDNow co-founder and CEO in an interview with InternetNews Radio.

To back up these claims, CDNow (CDNW) Thursday released traffic figures for February that showed a 23 percent increase over January. The firm also said it has also added 300,000 new customers since the end of 1999.

While those numbers are impressive, Rob Martin, an Internet analyst with Friedman, Billings, Ramsey and Co., said the company's biggest problem has always been the money it's spent to build its brand. In the fourth quarter alone, the company spent $26 million on marketing out of $53 million in total revenues.

"They've had some great things they've done along the way, but they've spent way too much on marketing deals that didn't produce sufficient results. That's pretty much the problem," said Martin.

CDNow's cash crunch made headlines March 13th, when it announced it was scrapping plans for a merger involving Time Warner and Sony, although those firms said they would invest a combined $51 million in CDNow. On Wednesday, CDNow shares fell more than 30 percent after its accountant, Arthur Anderson, filed an audit with the Securities and Exchange Commission expressing "substantial doubt" about the company's "ability to continue as a going concern."

While its banker, Allen & Co., seeks additional financing or merger partners, Olim said CDNow is throttling back its marketing spending. To grow the top line, CDNow will monetize its strong site traffic by shifting to a new emphasis on advertising revenue from firms including the Gap, JC Penney, United Airlines, and others.

Olim blamed the nearly two years the company has spent in mandated quiet periods for CDNow's difficulty communicating its strengths and prospects to investors and the media. But he acknowledged Thursday that his company had made some missteps since he and his brother Matthew founded CDNow six years ago.

"There's no denying that some of our marketing strategies have turned out to be failures. If I were to start an Internet company today in the same sort of competitive environment I had back in 1994, I'd be able to do a better job, but by no means do I regret any decisions. We made the best decisions at the time," said Olim.

Martin of FBR believes CDNow hopes to talk its stock price back up so that an acquiring firm will be willing to pay $6 to $10 per share to take it over.

Olim declined to discuss the status of CDNow's search for a partner, although he said that he's confident the quest will be successful, and that he has the skill and determination to stay on at the company's helm.

"I hope I can continue to drive this revolution. That could be the decision of a partner and I would respect in the interest of shareholders. But I believe there is a tremendous amount left to do and I am looking forward to doing it."