N2K Bear's Rebuttal
Rick Munarriz ([email protected])

I'm all amped up with everywhere to go! Let's start with gross margins. In his opening piece Louis pointed out how Trans World had 37% margins. I'll kick in by saying Musicland had 35% gross profit margins last quarter. Robertson Stephens, a bull on the company, expects gross margins on music sales at N2K to rise from 7% last year to just 8% this year. With friends like this, who needs enemies.

This is gross! Literally! You see, while Virgin may be able to sell that CD that cost them $10-$11 for $15-$17 in suburbia, Music Boulevard will always have to be a deep discounter to the tune of $12 or $13, or so. While the difference may seem like only a few bucks, considering the fixed cost of the goods, the gross margins vary widely. That is why those brick and mortar places we Net-lovers often refer to so condescendingly are not so shabby -- and might always command 2-3 times the gross profit margins of the Internet peddlers.

Why? When you're at a mall-based record store, what are your alternatives? If you're lucky, the shopping center has another music shop at the other end of the mall. Online you are a few keystrokes away from countless growing alternatives. Pricing has to be kept competitive. Tack on shipping. If you want your Music Boulevard order in two days, prepare to fork over (see shipping costs with that Web link) another five bucks! Worse still, this is the finicky world of music, and in the days it takes for your CD to arrive, who knows if you've grown tired of Ginger and the four other Spices.

Where N2K can bulk up on margins is in the relatively cost-free sale of advertising. Robertson Stephens is expecting "webvertising" sales to grow three times as fast as N2K music sales in two years. That in itself doesn't make sense. Neither does the fact that, unlike a non-vendor magnet like Yahoo!, what good is a banner on Music Boulevard? Does N2K want to lose shoppers with a link elsewhere before completing a sale?

Louis points out that analysts expect losses over the next two years. Take my hand, climb over the millennium, and see what Wall Street has yet to show you. The profitless Magical Mystery Tour has a long way to go. Even with sugarcoated 20% gross margins the company will need to sell $300 million to breakeven.

But who needs black ink when we have black eyes. Louis talks eyeballs. Let's talk eyeballs. Last quarter N2K had 49 million page views and only rang up sales of $4.8 million. That is less than one CD sold for every 100 pages viewed.If a traditional shop were batting that low it would be history. But the grimmer truth is that to hit that $300 million sales mark N2K would need more than 3 billion page views a year. That's six billion eyeballs!!!

So Louis thinks that N2K will actually increase market share now when so many new players like Amazon are taking advantage of the low barriers to entry. Why choose N2K?

Location? The Internet vendors are outbidding each other for prime real estate. Sound familiar? Sound like brick-and-mortar? Louis points out that N2K has AOL, with the $18 million receipt to show for it, but it really doesn't. The popular Love@AOL signed a pact with CDnow. Here at Fooldom we'll be more than happy to send you to "melody maybe Amazon." As the stakes grow, I fancy the rent due will go from Baltic Avenue to Boardwalk. Today N2K has to sell $100 million just to cover the $10 million it paid to Excite over the next two years.

And selection? Louis points out that the music merchant now stocks 500,000 different titles. Last year the company sold less than a million CDs. Did it sell just two of each? Of course not. It is just a handful of titles that make up the bulk of sales. If housing The Chipmunks Go To Hawaii is the key to success, then its time for a major key change.

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