What’s Next for CDNow?

What a strange week for CDNow. Just as the music e-tailer announced that its proposed merger with direct marketer Columbia House had crashed and burned, PC Data released figures showing that the company actually outpaced Amazon.com in home-based buyers for the month of February.

Still, the failed merger is leading many investors to believe that CDNow is an example of a pure-play e-commerce company that is unable to keep its house in order.

Amazon, for example, has seen its share price sink from more than $100 (US$) in January to less than $65 this week. CDNow has drifted down from a 52-week high of about $23 to its current price of under $8.

Latest Shakeout Victim?

Since the beginning of 2000, pure-plays have been putting on helmets and ducking for cover.

In January, software e-tailer Beyond.com accelerated the so-called shakeout by announcing a corporate restructuring. The revised plan called for the company to refocus its marketing efforts on businesses, reduce its work force by 20 percent and search for a new CEO.

Another e-tailer that stumbled earlier this year was Value America, Inc. The online superstore announced a major reorganization as its stock sunk to $5.75 per share from a high of $74.25 in April.

Keeping Pace with Shopper Growth

A recent report by Forrester Research indicates that there are three benchmarks that — if reached — can help an e-tailer make it through the ongoing shakeout and beyond.

Since online shoppers will increase by 63 percent this year, the research firm says, sites that fall below 50 percent growth in registered users are not keeping up and should shift to a niche market — or hope to be snatched up by a big player.

“In contrast, sites that grow their user base this year by at least 75 percent are growing ahead of the market and can justify postponing profitability at least another year,” the report contends.

Survival Kit

Forrester also predicts that the average Web-shopping household will spend 17 percent more in 2000 than in 1999, meaning that sites must also increase the number of purchases per customer and the amount each customer spends.

If the growth of both numbers stays below five percent, the company warns, the site is in serious trouble.

“To keep ahead of the market and justify continued development spending, both indicators should grow at least 10 percent, producing a 21 percent customer revenue increase,” the report adds.

CDNow Cuts Back

CDNow reacted to the demise of its merger plans by announcing significant cost-cutting measures. The company also said it had borrowed $30 million in convertible debt from Time Warner and Sony Corp. and received an equity investment from the companies of $21 million.

Additionally, CDNow has retained Allen & Co. to explore its strategic options — which include a possible sale.

So, while it appears that these latest capital transfusions will keep CDNow afloat for the short term, fundamental changes are needed. If CDNow does not find a way to strengthen its position, it may well find itself at the head of a long, sad death march this summer.