Stock Brief
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Updated 02-Jul-98
Buying CDs On The Internet
One of the factors behind the incredible valuation of portal Internet companies is the idea that, by virtue of the brand name,
they will dominate Internet sales in their category. Amazon.com, for example, has repeatedly stated that their intention is to sell all
consumer items, not just books. Why will they win at this? Because they have the best brand name, goes the argument.
Leaving aside the issue of whether there can be 20 "portal" companies, we wanted to examine the issue of execution. After all,
you still need to deliver the goods and service that your portal customers will buy. If they go somewhere else (easier on the Internet
than anywhere else) because of bad service or difficulties, the portal idea becomes meaningless.
With this in mind, we decided to go buy some CDs. And see who does it best and easiest.
On a purely subjective basis, we picked the following 5 CDs to buy.
Symphony No. 2, Resurrection, by Gustav Mahler, any conductor or orchestra
In a Silent Way, Miles Davis
Vertical Man, Ringo Starr (his latest, just released)
1928 Sessions, Mississippi John Hurt
Come On, Come On, Mary-Chapin Carpenter
We choose the following 5 companies to buy from:
Amazon.com (AMZN) www.amazon.com
CDNow (CDNW) www.cdnow.com
N2K (NTKI ) www.n2k.com
CDWorld (private) www.cdworld.com
CDUniverse (private) www.cduniverse.com
For each CD, we looked for the following:
Price
Availability
Music Clips (samples playable in any form, Real Audio, or other)
Reviews, either by the firm, or copies of magazine review, or jacket information
We also looked at how well the navigation systems took us to the right CD, and how easy it was to "checkout," including whether
you were informed of the running total or not.
Quick Summary
The Results? A private company, CDUniverse, won our comparison test as the best place to buy CDs. The most widely known
name, Amazon.com, had the worst system for buying CDs.
What does this mean for investors? We are well aware that the best product does not always win in the marketplace.
Good distribution of an inferior product usually beats poor distribution of a better product. But it's so easy on the Internet to
switch suppliers, if you can just find out about them.
Back in May, we identified the brand name concept as one of the driving forces behind the valuations being placed on
Internet portal companies. We wondered at that time "if ... a previously unknown CD Internet service is able to come to the web
now, and meet with fast booming success, we might conclude the reintermediation concept is wrong." (Reintermediation means that
only a few companies will dominate all e*commerce on the Internet.)
We aren't ready to conclude that yet, but we don't think it's a certainty that all big players will squeeze out the little guys on the
Internet. Especially if the little guys are profitable.
Investors in portals should consider, as part of their due diligence, the following question: Does the Internet allow
smaller players to come out of nowhere and create a market for themselves, without partnering with a portal? If the
answer is yes, it means portals may be unable to hold onto a controlling position over time.
The Winner
The winner of our comparison test, CDUniverse, is a private company in Connecticut. Privately funded by its President,
Charles Beilman, the company did nearly $6 million in business last year, its second full year on the Internet. It currently operates
at a "modest profit." N2K, by comparison, lost more money than they brought in. CDUniverse has no current plans to go public.
REV MRQ
PROFIT
AMZN
87.3
(9.3)
NTKI
7.0
(13.7)
CDNW
10.0
(9.2)
CDUniverse
1.5 (est)
modest
CDWorld
N/A
N/A
Does a company like CD Universe have any chance to compete with Amazon.com? Business common wisdom would say no,
the company with more money and wider name recognition will ultimately dominate, or buy the challengers.
But the Internet has one unique difference. You can change vendors without getting out of your seat. All you need to do is
hear about it and click there. The valuation of all portal companies is based upon the concept that customers won't hear about
anything except the portal. This may well be true, but it is by no means certain.
And what if Yahoo starts selling CDs?
The Survey Results
Leaving those heady questions for you to ponder, here are the results of our comparison tests.
Navigation
Selection
Info
Clips
Price
Checkout
Total
Amazon
3
3
3
2
4
2
17
CDNow
4
3
2
3
2
4
18
N2K
2
4
5
2
2
4
19
CDWorld
5
4
1
2
4
4
20
CDUniverse
4
5
3
4
5
5
26
Amazon.com
Although the giant among these companies, we found it harder to buy CDs than books from them. Navigation was harder
than it should be. First of all, every time we selected a CD, and clicked okay, the Search Box radio button kept reverting to Books,
instead of Music. If we forgot to set it back, we would get Item Not Found messages. This despite the fact that we had first selected
"MUSIC" from the home page.
Also, when viewing a CD, the selections on the side-bar menu were confusing. It seemed like the default was to display all
information possible. When you click on the side bar choices, it only filters the information you have already seen.
Amazon.com was the worst at keeping a running total of what you have ordered. It was the best at being able to figure out what we
were looking for, however. But since the pricing wasn't any better than anyone else, why use it? Because you already know the
name. Recognition is the strongest thing Amazon has going for it.
N2K
By far the most confusing to navigate. For starters, the home page gives you a choice of Music Boulevard, Jazz Central, or
Classical Insites. For our purposes, this was confusing. Searching for Mahler in Music Boulevard came up empty. Searching in
Classical Insites came up with 182 hits, but you couldn't search for Symphony No. 2, nor was the listing alphabetical by piece. We
had to really hunt to buy the Mahler piece.
The N2K site was also littered with ads for specials and bargains, which got tiring after a while. Also, the all black
background of Music Blvd. was uncomfortable. There was a tremendous amount of information about Miles Davis available, and it
was highlighted on the first page. But did it lead us to buy the album? The theory is that information like this will lead to sales, but
for us it was a distraction from buying.
We also didn't like the fact the N2K site wouldn't play the Ringo clips on our Version 4.0 of Real Audio, (telling us to upgrade) but
we could play the same clips easily on the other sites.
Overall, the N2K site was just harder to figure out, compared to others, with no perceivable benefit to the user. There may be
some reason why this site design leads to more sales, but we couldn't see it. Also, it had the highest price for Ringo's CD.
CDNow
Another site where we couldn't get the Mahler CD. If it's in there, we couldn't find it. Overall navigation was pretty clean. Track
Clips were playable by selecting from a drop down box, but they also have a "Track Listing" drop down box, which doesn't appear
to do anything. Its search abilities were limited, but the prices weren't. Also, fairly thin on review and info material.
CDWorld
A private company, but we couldn't find out much about them. The first time we went to site, it wasn't working. Fairly easy to
navigate and read, but the total absence of review or any textual material other than track listing was disappointing. But there were
several choices of Mahler's Symphony to choose from. In addition, the "In Stock" status tells you how many CDs are in the
warehouse (there was only one copy of the Mississippi John Hurt album, for example).
CDUniverse
This was the hands-down winner as far as ease of use and navigation, combined with selection. Although it fared
poorly on the "half-search" tests, the rest of the presentation was extremely straightforward. It was immediately obvious that there
were 27 different versions of Mahler's Symphony no. 2 to choose from. CDUniverse was particularly good at the music clips
and information, as well as being the easiest to purchase multiple CDs from, and review your running total. To top it off, it has
the best prices. Overall, it simply made buying CDs easier than the others.
In the following table, we list the results of our search for the 5 CDs on the 5 suppliers.
Amazon.com
CDNow
N2K
CDWorld
CDUniverse
Mahler
Price
N/A
N/A
21.99
26.77
20.77
In Stock
NO
NO
YES
YES
YES
Clips
NO
NO
NO
Reviews
NO
NO
NO
Miles Davis
Price
11.49
11.49
10.34
10.47
9.77
In Stock
YES
YES
YES
YES
YES
Clips
NO
NO
YES
NO
NO
Reviews
NO
NO
YES (many)
NO
YES, (many)
Ringo
Price
11.88
12.99
16.97
13.47
13.37
In Stock
NO
YES
YES
YES
YES
Clips
NO
NO
YES *
NO
YES
Reviews
NO
NO
NO
NO
YES
Miss. John Hurt
Price
12.99
15.99
13.49
13.47
13.37
In Stock
YES
YES
YES
YES
YES
Clips
YES
YES
YES
YES
YES
Reviews
YES
NO
YES
NO
NO
Chapin Carpenter
Price
11.49
11.49
11.49
10.47
9.97
In Stock
YES
YES
YES
YES
YES
Clips
YES
YES
YES
YES
YES
Reviews
YES
YES
YES
NO
YES
* Clips available, but did not play on our Real Audio 4.0 version.
Search Capabilities
To sell something on the Internet, the user has to find it. But users aren't always able to provide the best information. The table
below shows the Artist names we typed in, and whether a match occurred on the first try. Obviously, you stand a better chance of
making a sale if you can give the customer what they want as quickly as possible. As you can see, it doesn't always work the first
time.
Entered
To Find
Amazon
CDnow
N2K
CDWorld
CDUniv
Ringo
Ringo Starr
YES
NO
YES
YES
NO
John Hurt
Mississippi John Hurt
YES
NO
YES
NO
NO
Mary Chapin Carpenter
Mary-Chapin Carpenter
YES
YES
YES
NO
NO
Parting Thoughts
Historically, brand name does win out over lower cost competition. But brand name traditionally means a better product as well.
Let's face it, Heinz is better ketchup than Hunt's. But on the Internet, the buying process is the key differentiator between vendors.
What will give a brand name lasting power on the Internet?
We'll be watching CD Universe as an example of whether the Internet marketplace will allow newcomers to come in and
grab a spot. Until then, investors in portals should at least ponder the question of whether the Internet helps bigger companies to
stomp out the little guys, or whether it provides a space for little guys, perhaps dozens of them, to roam freely. Only time will tell.
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