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< StockTalk >
TMF Interview With CDnow President & CEO Jason Olim

April 20, 1999

With Yi-Hsin Chang (TMF Puck)

In March, online music store CDnow Inc. (Nasdaq: CDNW) completed its merger with former rival N2K, which had operated the Music Boulevard website. Working to integrate the CDnow and N2K operations, the combined company now offers more than 500,000 CDs, videos, DVDs, and T-shirts, plus RealAudio sound clips to about 1.6 million customers.

TMF: The topic on everyone's mind is your recent merger with N2K. How's that coming along?

Olim: Excellent. Excellent. In fact, the merger closed on March 17. So that was about a month ago that it closed, and we've already basically integrated the two organizations. In fact, we had already done that about a month before the merger had officially closed. Having started back in October, we had plenty of time to put it together. So, yeah, the merger's really going fantastically.

TMF: What do you think are the strengths of CDnow and N2K, and how do they complement each other?

Olim: I'd like to take that question back to something a little bit more fundamental, which is how the visions of the two businesses complement each other because then you'll see how the strengths of the companies play out and where it comes from. I started CDnow with my brother really as a way to build a better music store. I started it because I wanted to get advice, I wanted to get recommendations, I wanted to understand something about the artist and about the albums more than what a music store could tell me. I built CDnow really as a library of information: all of the reviews and biographies and recommendations, that sort of thing, connected to a store.

"You don't need to spend as much to support one brand as you would need to spend to support two."
Now, N2K began with a belief that the Internet was going to be the next form of entertainment, and so they built entertainment areas related to genres -- JazzCentralStation, Classical Insites, Rocktropolis -- with the belief that people were going to go in and listen and spend a lot of time.

CDnow began from a perspective of efficient, effective, high-quality retailing, and Music Boulevard began from a perspective of entertainment, learning, music experience. So when we put the two businesses together you're going to find the strength of each company relates to the founding vision. CDnow has a real strength in technology, in user interface, in the retail component of the business, and N2K has a strength in editorial content and advertising, and really more of the music side of the business. So, together we have a phenomenal global store and an extraordinary amount of information and entertainment content.

TMF: How much do you expect to save in expenses as a result of the merger?

Olim: Well, we think that between our stand-alone plans and our combined plans we shave something like $20 to $25 million off the expenditures in '99 and $30 to $35 million off of expenditure in 2000. Now, the bulk of that comes from savings in sales and marketing. Sales and marketing is obviously such a big line that there's room to find savings. We think we can do that because we're only supporting one brand, and so whatever additional money we spend on one brand creates greater brand awareness, but you don't need to spend as much to support one brand as you would need to spend to support two. I can spend less money and still have greater brand presence than two brands could have had.

TMF: Well, it's good that you mentioned that because I read that on May 18 you'll combine under the CDnow name, so I guess you won't be able to find Music Boulevard.

Olim: Well no, it'll go to CDnow with a special message explaining what's happened, which is what you already get, but it still goes to Music Boulevard now. So on May 18 it's going to be the one site, one brand.

TMF: A megastore.

Olim: Yes.

TMF: Why did you choose to consolidate under one name instead of having a network of smaller sites that perhaps are specialized and dedicated to various users?

Olim: If you have multiple sites that are specialized, they're actually not the most powerful concept because you can put -- as we're doing though fusion -- you can put the strength of all sites into one site. Why have one site that's better for classical music and another that's better for rock music when you can have one site that's best for both? Our strategy of combining all of the strengths into the fusion site we think is just really very powerful. Not only can we have the best services in the one site, but we save a ton of money in terms of development and technology costs.

"We shave something like $20 to $25 million off the expenditures in '99 and $30 to $35 million off of expenditure in 2000."
Having a single site is really the most powerful alternative. Having a single brand is also the most powerful alternative and really for two reasons. One is you can endow the brand with greater depth and meaning because you have all the features available under one brand. And the other is that putting two brands into a market each with 10 units each of marketing expense is not as good as putting one brand into the market with just 15 units of marketing expense. To create a clarity, a dominating share of voice in the market is much more powerful than splitting that share among multiple brands. So from the perspective of spending to raise customers' awareness, we save a lot of money and get a lot more clout by having a single brand.

TMF: I can tell that's really good for attracting new customers, but what about old customers who are used to Classical Insites or JazzCentralStation? How are you going to keep from losing them?

Olim: That's the most important question that we had to face with the merger. This has really never been done before. No one's ever combined two major e-commerce companies into one, and Music Boulevard has a million customers. How do you keep from losing any of those customers? The strategy that we've adopted is a strategy of building a better music store for you. Now you could be a CDnow customer or a Music Boulevard customer or one of the less than 10% of the customers who were users of both sites, but the strategy is, build a better music store.

"The only thing that a Music Boulevard customer coming to this new site should really feel is there's a new name and the site's a lot better."
This is not a compromise and in no way should this be a downgrade for any customer whether it's a Music Boulevard or a CDnow customer. It has to be an improvement for everybody, and the only thing that a Music Boulevard customer coming to this new site should really feel is there's a new name and the site's a lot better. That should be it. So what we've got is a site that preserves all of the very powerful features of Music Boulevard -- the content, the editorial, the artist interviews, the music news, and the daily music news -- all of that is not only retained but improved, taken to the next level.

The Music Boulevard customer has a bigger product selection, more sound samples, pricing that is just as good. They have all of their account information, everything -- their order histories all available to them. They have just basically everything as good or better than they had before. The only thing they've got is a new name. Now what we've done for the look and feel of the site is to come up with a color palette that does rely on white as a background color, not black.

TMF: Oh no! I like the black, personally.

Olim: You were in the minority. Some people like the black. [The new CDnow site] does use a white background color, which we found is tested to be substantially superior to the black. But it also uses other colors that create a relatively smooth transition from that [Music Boulevard] site to the new site. So a lot of the colors are retained. The look and feel, while it's entirely new, is a logical progression. So it doesn't feel like in anyway that you are moving to something else or something worse or something different, but you feel like you are moving to something better.

"Our brand, the music brand, our business is not a shop, but it's really a place to connect to music."
Actually choosing the color -- something old, something new, something borrowed, something blue -- the old was the white, the new was the new highlight color, the borrowed is some of the gray from Music Boulevard, and the blue is the CDnow blue. So we really looked at this as a marriage, but the outcome had to be substantially better than what the Music Boulevard customer has and also has to be better than what the CDnow customer has.

To bring our business forward, this fusion site -- I'm going to tell you, our lives have stopped for fusion, and there is one thing that we're doing and that is putting the two companies together. The infrastructure, technology, marketing, human resources -- everything is working towards fusion. Some people's work is kind of finished. A lot of the marketing work is already planned out and is already going. But basically we've been putting all the resources of this company behind combining these two websites in such a way that everyone will feel that this is better in every way and that nothing is worse. So, yeah, preserving those million customers is absolutely critical.

TMF: Well, you talked about brand and building CDnow. Well, Amazon.com (Nasdaq: AMZN), for better or for worse, is one of the dominant players on the Internet and seems ever expanding. What's your strategy of taking over that in terms of music?

Olim: Well, I think you have to look at our businesses as being very different. And you have to see that we have different strategies if you're going to understand what we're doing. Our brand, the music brand, our business is not a shop but it's really a place to connect to music. Now what does that mean? It means that if someone thinks about music, it doesn't matter whether they think about buying music or they think about reading an artist interview, or they think about promoting their unsigned band, or they think about chatting with somebody else. If somebody thinks about music, they'll think about us.

We are the best-known music brand. We are the highest-quality music brand. When someone shops for music online, they're going to rate -- this is according to our internal and very rigorous studies -- they're going to rate CDnow as by far the best place to buy music online. So our strategy is to create a very vertical business and generate profit not just from selling music, but from selling advertising, by selling the value of the customer visiting the store, and there's no reason why we can't and won't and don't say that we do in fact sell other products besides music. We sell movies and DVDs and gear, and selling electronics and even music-related books certainly are all in the cards for us.

"CDnow is a music destination. It is a place where you can go to learn, to experience, to listen, to buy."
When a customer visits, though, the reason they visit us is not just because they are looking for a place to buy something, but they're looking for music. So that we have in spades. In fact, it's why we've been growing at such a dramatic pace. We are a vertical business and not a department store, and that's a different business, but that's our business. And it's also a model that we believe has shown to be very successful and extraordinarily profitable.

TMF: Are you envisioning CDnow as more of a music portal than just a music store?

Olim: I never use the word "portal." It's hard to ascribe a meaning to the word "portal." CDnow is a music destination. It is a place where you can go to learn, to experience, to listen, to buy. It's a "connector." This is not one of the words in lexicon yet, but "connector" is probably more meaningful than "portal" if you want to ascribe a definition to it. We're a place where if you want to connect to music or to other people who are interested in music, this is the place to go.

TMF: Several of the big-name record companies, including Universal and BMG, have recently launched online music stores. Are you concerned about the competition -- I mean, they're the people who make the music, right?

Olim: Well, there's a huge difference between making a product and marketing a product. In fact, the skills you need to find an artist, listen to that artist, decide you're going to put money behind that artist, record the artist, get a video made, get the video on MTV, then get the product stocked in retail stores -- there's not an element of that skill set that overlaps with the skill set that we have, which is to build a store environment, market a brand, create an experience, and convince the customer that this is a place that they want to buy. There's really no skill set overlap.

Yeah, so they manufacture the product, but what does that really get them? It really doesn't get them a whole lot. I sold $100 million in music last year, and we're growing. What is it that they have that they can leverage that incidentally wouldn't also land them in court for unfair trade practices? Not a whole lot. I think what it does is it validates the industry. It means there's going to be even more attention by the manufacturers in terms of supporting the industry, making it successful.

TMF: What new features or technologies are you planning to add to the site? Do you see downloading music and customized CDs as the wave of the future?

Olim: We do, and those are things that we've not only pioneered but lead, and we intend to continue to lead that space. So the downloading and the creation of customer compilations are a clear critical business for us and we're making significant investments there.

TMF: Do you think that will become the main way music is sold?

Olim: In 5, or 10, or 15 years maybe.

TMF: So a very serious question. What's it like to work with your twin brother?

Olim: We actually don't really work together much. We have very different roles.

TMF: Are you identical twins?

Olim: Fraternal.

TMF: So you don't look alike?

Olim: We don't look alike. We're very different, and we play very different roles in the company, so we have not too much interaction, but when we do it's great because we've spent the last 29 years learning how to live with each other. So we have a lot more history as partners than most people so it works very well for us.

TMF: Thanks a lot.

Olim: Thank you.

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