Chapter 13: The Nature of Online Competition

Some Background

The Internet offers some exciting opportunities to directly market to the consumer. One company attempting to take advantage of this method of selling is CDNOW, a distributor of music CDs and videos. At the CDNOW web site, you can listen to samples, peek at this week's charts, or of course, purchase one of CDNOW's 165,000 CDs or 35,000 videos.

CDNOW's founder, Jason Olim, articulates the CDNOW business philosophy.

There are two tests which we apply to everything we do at CDNOW. First, are we doing something that takes unique advantage of the power of the new technologies? And second, are we better served using these technologies than using the old methods. If the answer is 'Yes' to both questions, then it's something we want to do.

Jason's partner in CDNOW is his twin brother Matt who works until 3 or 4 am every night developing and tweaking the programming code that keeps the dollars flowing in. The part of CDNOW that meets the eye, the pages themselves, were developed with help from cross-discipline teams including designers, writers, artists, marketers and customer service specialists.

The brothers were featured in the June 1996, issue Inc. Magazine in which they guess-timated projected 1997 sales at $30,000,000! As of this writing, the site was receiving 400,000 shoppers per month. This looks like printing money, doesn't it? But clearly CDNOW has put a lot of thought into the "information environment" and into adding value to the music shopping experience.

Your Assignment

What kinds of risk might a consumer perceive as he or she contemplates purchasing from CDNOW? How does CDNOW work to mitigate against those risks and set the consumer's mind at rest?
It is important for the marketers at CDNOW to understand the ways in which consumers search for information in this product category. How do you decide what CDs to buy? What kinds of search behavior do you think consumers go through in this product category? How well is CDNOW leveraging the searching capabilities of Networked computers to help generate sales? Can you think of any ways to improve it?
Is this a good or poor product category for direct marketing on the Internet? Justify your answer.
Direct marketing has been going on for some time. Catalogs have been in use for over a century, and direct mail and toll free phone numbers are well established if not quite so old. What features of the Internet make it unique or different from previous direct marketing channels? Discuss how these differences affect profitability.
Music is one of the largest of the entertainment industries, and CDNOW is now not alone. Some startup competitors include CD World, CD Universe, EMusic, and Tunes.com. Two competitors who predate the Internet are Columbia House and BMG Music Service. On what basis would you propose that CDNOW compete with these other firms? In other words, what might CDNOW do to differentiate its service from these other companies? How well is it differentiating itself at this time?

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