June 11, 1998 5:00 AM PDT

Amazon launches Net music store

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Net bookselling giant Amazon.com today launched its online music store, long anticipated by Net consumers and much feared by industry rivals.

The music store--which the firm soft-launched in April to gather user CD reviews and comments--maintains Amazon's look and feel. "So if you're a book customer, you'll feel immediately comfortable" in the music store, said David Risher, Amazon.com senior vice president.

Other similarities between Amazon's book and music areas include the discount structure, the community in the form of reviews from customers as well as outside publications, and a large volume of titles available.

The Net booksellers--especially Amazon--largely have created the pricing structure adopted by many Net music retailers, notably the 30 percent to 40 percent discounts on select titles. As the company leverages its built-in customer base to expand its product offerings even further, it can apply its pricing structure across the board.

Genni Combes, a senior analyst with Hambrecht & Quist, pointed out that the company's name is derived from the Amazon River, which could shed some light on why it is expanding its product line. "It's the deepest river in the world, which should tell you something about their strategy."

The firm in April said it would acquire the Internet Movie Database, its first material step toward Net video sales.

Analyst reaction to the launch of the music store overall has been mixed, with some predicting doom for other Net music retailers and others expressing doubt about Amazon's success in the already-crowded Net music arena.

The online store offers more than 100,000 CDs. Although Risher said the average brick-and-mortar music "superstore" carries about 30,000 titles, and Amazon bills itself as "Earth's biggest bookstore," competitors CDnow and N2K's Music Boulevard both offer upward of 200,000 CD titles.

Risher explained that the Amazon music store is being launched without classical music titles. He said that catalog is "in the works," though he declined to comment on when the classical titles will be offered. "Once we add classical, we will definitely have the biggest selection," Risher said.

The store also sticks to Amazon's discount pricing system, with many titles available for 40 percent off and hundreds sold for 30 percent off, including the Amazon.com 100--a weekly list of the site's top-selling CDs.

Many Net music retailers discount heavily or offer specials such as free shipping to attract users. But Amazon has an advantage in that books yield a higher margin from sales than CDs, noted Mitch Bartlett, senior analyst with Dain Rauscher Wessels. Amazon can afford the lower margins from discounted CD sales since it does not rely strictly on those margins as its bread and butter.

In addition, the Amazon store offers reviews by users, Amazon employees, and outside publications such as Rolling Stone, Vibe, and Spin as well as charts from Billboard magazine and CMJ. It also is offering more than 200,000 30-second sound samples and features inherent in Amazon's book site, such as recommendations based on previous purchases and extensive artist and genre information organized into various categories.

Many of these features have become mandatory for music sites, however. Music retail sites frequently give users add-ons such as sound samples and charts in an effort to differentiate themselves. But as soon as one site adds something, others tend to follow.

Bartlett described Amazon's music effort as a "very true threat" to online music retailers such as CDnow and Music Boulevard, partially because of Amazon's built-in customer base.

"As I look at the other [music] businesses Why Wall Street loves Amazon.com on the Net, I see them spending $45 to $60 or $70 to get a customer. Amazon already has the customer base, and this broadens their ability to penetrate current customers by pushing through to other members of the family," he said, pointing to teens, who are traditionally active music consumers.

Plus, Bartlett noted, Amazon boasts a high level of repeat customers--something music retailers online have had difficulty achieving. "CDnow and N2K have spent quite a bit of money to attract customers, but they don't enjoy a high frequency of repeat customers," he said.

"The economic equation is strengthened for Amazon and potentially weakened for the others [selling CDs online]" because Amazon could take sales away from rivals, and the addition of music broadens the firm's line of products.

Others were more skeptical about Amazon's place in a crowded and active marketplace.

"Amazon has proven itself to be a real Turning to a global page formidable online retail competitor, but it's a crowded market they're entering," said Regina Joseph, senior analyst at Jupiter Communications. "Amazon's music store is not going to have the same level of rapid success it has had with its bookstore."

Although Joseph also said Amazon has an advantage with its already-established customer base--"They bought books, so it stands to reason they will buy CDs"--she warned that "[Amazon's] success is not necessarily guaranteed in that space," especially given the number of players already entrenched in online music sales.

Hambrecht & Quist's Combes predicted that Amazon would be "a big player" in the Net music space, but that there will be enough room in the marketplace to allow for a few contenders.

"Other players within the industry will continue to do well, but I think Amazon will garner a powerful market position," she said.

All the analysts agreed that offering more products is a wise move for the firm.

Bartlett noted that Amazon--unlike many Internet companies--has its own distribution centers, which helps it get "better terms from publishers" and allows it to guarantee timely delivery.

With the cost of the distribution centers, "the return on [Amazon's] investment gets diluted a little bit, and Wall Street is very keen on them improving margins," he said. "But it's a trade-off that should be made because you want to service the customers better."

Amazon's Risher said the company chose to invest in the distribution centers instead of outsourcing distribution because of customer service, but also because it lowers shipping costs for customers since all the items can be sent at once.

 

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