The CDnow Story

My shelves are full of books on how to make money on the Internet. They tell you how it can be done, what possibilities it offers, how you have the potential to exploit online trading. Like most "How to..." books, they tell you how it could be done. And basically, they all say the same thing. This is email - send out lots of messages. These are newsgroups - advertise in them, but not too much. Create a database of customers. Build a user-centred web site. It's all good advice; but it's theory, not practice. Because none of these books have been written by people who run successful businesses in the on-line world.

The CDnow Story is different, because it's been written by two young men who have actually done it. Jason and Matthew Olim are the famous twins who founded the world's biggest online music store from the basement of their parents' house. They started in 1994 with an investment of $1500 Jason had saved up to buy a guitar. Within three years, they had a turnover of sixteen million dollars.



It's now well known that even big businesses have had problems making money on the Internet. So what was it that made CDnow so successful? Well, a combination of factors - plus a lot of hard work. To start with, there was a clear vision and a new idea: an online record-ordering service with its own database of reviews and information. Second, they hit the Internet just at the moment the number of users went into exponential increase during 1994. They chose an item that was easily ordered and posted. They didn't become involved in production and distribution, but left that to others. And despite all their claims to the contrary, they started with a reasonable knowledge of computer programming.

This book charts the development of their success - and they explain quite frankly where they think they made mistakes - and how they corrected them. There are many useful lessons to be learned from all this - even for those of us below the millionaire standard. One is the amazingly conservative nature of many businesses - even venture capitalists - when confronted with a profitable but new idea. Only one record distributor would touch them at the outset, and that was owned by a friend's father. [This company has now increased its turnover enormously, due to its contact with CDnow.]

Their experience reflects the breathtakingly rapid development of Web commerce in its early phase:

"From being a small company that nobody wanted to talk to in 1994, by 1995 we were swamped with requests from companies wanting to make more money from their Web sites by pushing traffic our way, and companies such as USA Today and AT&T were calling us to talk business."

They had to scratch around for money to begin with. The rules of electronic trading were being made up as they went along. And all the time they were in competition with huge companies with bottomless coffers - but who were too big to move quickly.

With the company in its current, fully-fledged, and successful condition, the account of their operations covers some very interesting topics for those interested in electronic commerce. They discuss the security of online shopping with credit cards which got off to such a bad start, but which they now claim is safer than in a shopping mall. They warn against the attractions and dangers of product diversification. They are surprisingly open in revealing their company's policies on cookies, external links, and the lessons of site log analysis. Having spent $3.6 million with Yahoo!, they have thoughtful reflections on customer retention, personalised accounts, and the effectiveness of advertising. They even discuss the new business model of affiliate programs, where people putting CDnow links onto their site are paid a commission on any sales.

En passant they offer some bracing observations on Web site design. This is in fact the only interface they have with their customers, since they won't take orders over the phone. So the driving factor in design is function [which confirms the advice given in the best design manuals]. They will have no truck with 'cool' design features, even when you think they might have been appropriate:

"we don't think that playing a sound as soon as someone enters our Web page makes a lot of sense. It's not cool. It just slows down the loading of the page, and can irritate the visitor. We do, however, provide hundreds of thousands of music clips that are available if you want them. We think that multimedia on the Web should be used to serve a purpose, not for its own sake."

If there is one important design message which emerges from this book, it's that Web sites, as Peter Kent puts it in a summative chapter, must be guided by what customers want, not designers: "CDnow understood the technological aspect [of design] right from the start...Graphic design came last; function was the primary concern."

They are very clear-headed and charitable towards their competitors, and even put forward the argument that with online sales still at only 0.7% of Internet users, the future lies in attracting new customers, not worrying about what Tower records might do next.

They end with some interesting reflections on the state of their own market sector - why for instance books and music have been the first products to be marketed successfully on the Internet. The reason they suggest is that people want a wide choice and detailed information about books and music - plus samples, which are not possible with wines, automobiles, or kitchen furniture. They even offer potential entrepreneurs hints on which categories of product are ripe for online sales.

If you're thinking of starting out in electronic commerce, this book would be a very wise first investment. They don't offer much detail on the hard economics of pricing, wages, costs and bank charges, but they will certainly inspire anyone with ambition, at the same time as providing valuable lessons on the application of rigorous self-criticism to the development of a commercial strategy.

OK, so it's an old story. The American Dream - or as the blurb puts it, "how two kids in a basement grabbed the on-line music business" - but this is an exhilarating account of Internet business methods which claims its force from genuine first-hand experience. It's also amazingly good value at the prices being quoted.