StockTalk:
TMF Interview With
N2K CEO Larry Rosen
With Yi-Hsin Chang (TMF Puck)
and Brian Graney (TMF Panic)

Aug. 5, 1998

Larry Rosen

Joining us this week is Larry Rosen, chairman and CEO of online music retailer N2K Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTKI)") else Response.Write("(Nasdaq: NTKI)") end if %>. Through its flagship MusicBoulevard.com website, the New York City-based company offers more than 200,000 music titles for sale to cyber-listeners. Today N2K announced a promotional and marketing alliance with Visa USA, which will become the preferred means of payment for Music Boulevard.

TMF: Thank you for joining us, Mr. Rosen.

Rosen: Happy to be here.

TMF: Could you tell us a little bit about the Visa agreement and what it means for N2K as well as the importance of the company's other corporate strategic alliances?

Rosen: Visa is a partner that we've been working with, and we've been working with a number of different companies over a long period of time here. With Visa, what we're looking at is their preferred card that we use as a promotion on Music Boulevard, although obviously we take cards from American Express, Mastercard, and so on. It's a long-range promotional plan that we have together with Visa, and we're just in the process of instituting that right now.

TMF: We're sure you're tired of hearing N2K being compared to the likes of Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %>, which sells books and music over the Internet. However, we have to ask: What sets your company apart from other cyber-retailers? And why is N2K a better investment for potential shareholders?

Rosen: Number one, our background is from the music industry. We look at ourselves as, I guess, the "category killer" in music. We're not selling books, we're not selling washing machines, we're not selling other types of products. We're just focusing in the music area. By being experienced in the music business for many, many years, we understand how you get the artist's music to the customer -- basically, how do you make the connection between the artist's music and the music fan? That's what we really concentrate on, so there are multiple ways that's being accomplished. That's really the mission of our company, and we think we do that better than anybody else since we know the category so well.

TMF: In the first quarter, you reported that 10% of your revenues came from ad sales and about 90% came from music-related sales. Do you see those revenue streams staying constant, or are they going to change a little bit?

Rosen: I see the revenue streams staying pretty much constant. The majority of the revenues obviously are coming from music, and we're looking from various areas of dealing with music. A lot of the advertising that takes place on our site are promotions that we're doing with record companies directly. A big factor since the growth of Music Boulevard has been so dramatic is the fact that in PC Meter's most recent numbers we're the top online music retailer, and for 1997 the fastest-growing music retailer on the Internet.

A lot of customers are obviously coming through our distribution partners into Music Boulevard. So the fact that we have distribution through AOL worldwide on an exclusive basis and Excite, Infoseek, Netscape, Disney, Ticketmaster, and recently with CBS Cable and their properties -- TNN, CMT -- ABC Television, and ABC Radio, it's driving a lot of music fans directly into Music Boulevard, which gives us the ability to work very closely with major record companies, artists, and promoters to help promote their products and get them to the customer in the most efficient method.

TMF: What are you doing to maintain that lead or to grow your market share in the online music business?

"We look at ourselves as, I guess, the `category killer' in music. We're not selling books, we're not selling washing machines, we're not selling other types of products."

Rosen: What we're doing is really coming up with very exciting promotions that I think nobody else could even approach. There are arrangements that we have in cross-media marketing that I think are very unique. Because when you think of the music industry and how you get music to fans, it's not just the Internet. Obviously, that's a new factor and a new element in the marketing scheme, but traditional areas such as television, radio, magazines, and other formats become very crucial. That's why our relationships with people like Ticketmaster, which is obviously the biggest area to buy concert tickets, and that linking directly into Music Boulevard becomes an extremely effective way of bringing in customers, the same way that we're dealing with people like Disney, which is a major media brand.

One of the big success stories that we keep talking about is with CBS Cable. In the country area, TNN, CMT, and Country.com, this is primarily a lock on how you promote country music. The promotions that we've been doing with them recently with Reba McEntire and most recently with Vince Gill and Brooks & Dunn, those promotions have scaled tremendously as far as the amount of sales that are being sold through our site in comparison just to all the records that are being sold in the U.S. for those particular artists. So we could see how these cross-media relationships in dealing with companies and with major artists are being very effectively initiated through our sites.

TMF: Realistically, how long do you think it will be until there's a mass market for downloading albums to your own CD and making customized CDs, and what kind of competitive advantages are there with that kind of distribution channel?

Rosen: We look at electronic distribution of music as a very exciting area. We were the first company to actually launch what we call EMOD, encoded music for online delivery, just about a year ago. Last July, we announced that we were the first ones to actually distribute music that way through the Net, especially in a copyrighted, intellectually protected form.

But what we have on our site right now, if somebody would go look at the Miles Davis area, if you go to Music Boulevard.com/makecd, you come to an area where we're combining all the elements together. I think that's very exciting -- to look at the Miles Davis discography, look at all his recordings, and then look at these specialty groups of titles. You could buy any one of the CDs in a finished-goods type basis -- buying the actual CD -- or you have a choice of making a custom compilation by choosing from over a hundred Miles Davis tracks.

As a matter of fact, we have major artists like Sting, people like Dave Grusin, Wallace Roney, and other major artists picking out their favorite CDs that they already made from Miles Davis, and from customers coming in saying what are their favorite Miles tracks[]. So we have music fans coming in, and they can either duplicate those kinds of choices, or they can make their own customized version.

The third version of that is that you can actually electronically download specific tracks through the Net. So we're the only place that could actually offer fine products in a finished-goods basis -- making a custom compilation and buying it electronically. So this has been launched very recently, and we think this is the kind of model of how it's going to work. It's not just a matter of buying music electronically or custom or just finished-goods basis, but the choice [can be made by] the music fan or for the customer -- how do you buy it in each one of these sources -- and you can mix and match. And I think that's what's really exciting.

"In PC Meter's most recent numbers we're the top online music retailer, and for 1997 the fastest-growing music retailer on the Internet."

TMF: Do you think that will become the norm for buying music, and when do you think that sort of thing would happen?

Rosen: I think it's the better choice. The norm meaning that everybody else is doing it. I'm not sure that everybody else will do it because I don't think every other company has the ability to do it. So for us this is the model that we're looking at. I think the idea of being able to combine these elements together is the best way and gives the best choice to the customer. So we're seeing that that is a real exciting way to present the music.

TMF: Do you think that will be a higher-margin business as compared to the normal distribution channel of going to a music store and buying albums there?

Rosen: Absolutely. There's a different margin for each element of this source of distribution. If you're going to be buying a product through Music Boulevard that's strictly a CD that you could buy primarily in any other store, that's at the lowest part of the margin because this is more of a commodity type of product. When you buy finished goods at Music Boulevard that are specialty releases that we're releasing directly ourselves, either through our label or through special arrangements that we've created with other record labels or artists, that's obviously a higher-margin product for us. When you get into custom CDs, that also has a higher margin element to it. The EMOD area where we're distributing music electronically has the highest margin.

So each element kind of has its own business model connected to it. We see electronic distribution of music being in some ways the ultimate way to deliver music. Certainly from a consumer preferred way and also from an efficiency point of view, it's really a great way to distribute music, but we still have certain areas here as far as bandwidth is concerned and the amount of titles that are available from the masters themselves to actually bring this into prime time. This will happen over a period of time. We're very confident of that.

TMF: Can you tell us a little more about Encoded Music?

Rosen: Encoded Music [] is our own proprietary record label. We have about 12 artists right now. We have a number of artists like Jonathan Butler, Candy Dulfer, Dave Grusin, and a number of artists that are doing very, very well -- they're kind of in the contemporary jazz crossover type area. Then, we have artists like the Tories and Swamp Boogie Queen and artists that are more in the pop-rock area. We actually have one artist, Max Levinson, who's one of the youngest, probably most extraordinary, young classical pianists. So we have a limited roster, but we're utilizing these artists to be able to promote them, not only through the Internet but in traditional retail as well. That's content that we own and we promote through our sites.

TMF: Your stock suffered a little bit after the 2 million share secondary offering in April. How important is N2K's ability to tap the capital markets for more capital in terms of the growth strategy for N2K?

"Just from the point of view of cash on hand, we're in a very strong position right now to execute our plan."

Rosen: As far as raising capital, when you're in an industry as new as the Internet primarily, it's a very important aspect of business. We've been very lucky. From our IPO we've raised significant capital, and certainly when we did our secondary following on our [initial] offering we also raised a substantial amount of capital. Just from the point of view of cash on hand, we're in a very strong position right now to execute our plan.

TMF: Even as the online music retailing leader right now, you have, I believe, about 2.5% of the market. Do you believe that it will all come down to just the few major names and will you be one of them?

Rosen: That's a PC Meter reach rating, which is totally different than market share. We have a very substantial part of the marketplace. It's hard to say exactly what the number is. Because a lot of companies don't divulge their online sales, it's hard to break that down separately. So it's very hard to tell what the actual market share is. Certainly, by everything that I've seen, we are certainly one of the market leaders in this particular area from the market share.

But to answer your question: How do you maintain that position, or how you can grow that position? It's really about creating a better offering for music fans. Ultimately, we think we understand music, the music fans, and the music industry better than anybody in this space, and we have created a very quality product. I think that's why we have customers that have become very loyal to Music Boulevard and keep coming back all the time. The more and more specialty areas we create and the more ways we react to what customers are looking for, I think we're just building a better store and a better relationship with our customer. I think that's a very key component to building your business.

TMF: Which of your competitors or other players in the e-commerce business in general do you respect the most?

Rosen: There are a number of players out there, and they all come from different areas. So there are certainly the traditional music retailers who have built sites on the Internet, and they look at it from a certain perspective. In a lot of ways, they're primarily looking at the Internet as another store to come alongside the other retail stores that they have.

Then there are Internet players only like the CD Universes, CD World, CDnow, and a lot of CD name kind of companies that sell music on the Internet. Then, of course, there's also the Amazon type model or other companies that are selling multiple lines of products that also sell music. You'll find they fit into different kinds of categories. Then you have the record companies themselves that have websites, but many of them don't sell music -- but they use it as a promotional medium. A lot of them link directly to Music Boulevard for their sales.

TMF: We'd like to thank you, Mr. Rosen, for sitting down and talking to us today.

Rosen: It's been a pleasure.

Related Links:

• Music Boulevard website
• N2K message board
• StockTalk with Platinum Entertainment