The problem could force PC makers to throw away critical parts of new high-end computers or face the prospect of shipping potentially faulty machines, CNET News.com has learned. Although it is too early to determine the extent of the damage, one analyst estimated that hundreds of thousands of computers are affected.
Perhaps more important for consumers, sources say Intel's interim solution also limits Rambus machines to 512MB of memory, half the capacity of conventional systems.
Intel anointed Rambus memory as a long-term solution for making sure that computers keep up with ever-faster processors. But the new development is the latest misstep in the adoption of the next-generation technology.
"This is so very close to the ship date for these machines that it must have been an absolutely terrible last-minute decision to make," said Peter Glaskowsky, an analyst with Microdesign Resources.
"It's going to be very, very expensive," he said. "Every machine put together has to be taken apart. The motherboards have to be taken apart and destroyed, and they have to build new motherboards."
The problem stems from how much memory the computers can use, Glaskowsky said. The systems built so far have three slots in the motherboard for Rambus memory, but now Intel has said that systems should only have two, he said.
The existence of the third memory slot can cause data to get lost while being transferred between memory and the main processor, Glaskowsky said. According to sources, Intel has notified manufacturers that the third slot is a problem, even if it's empty.
Some manufacturers may still ship affected computers, but others will scrap the guts of the systems they have built so far and start over, sources familiar with the problem say.
Intel and Rambus declined to comment on the matter. However, Glaskowsky said Intel personnel confirmed the existence of the problem, which was acknowledged by other industry sources as well.
"The Rambus electricals are absolutely state-of-the-art for today's technology. When you come down to it, I guess they just pushed too hard," Glaskowsky said.
Limiting computers to two slots means they can use only 512 megabytes of memory instead of 768, although future Rambus chips will boost that to 1 gigabyte even with only two memory slots available, Glaskowsky said.
A rocky start
In February, Intel delayed the chipset needed to use Rambus memory from June to September, high Rambus prices are expected to curtail demand, and Intel apparently has scaled back its manufacturing plans.
Rambus doesn't actually manufacture memory. Instead, the company licenses its designs to memory makers and charges them a royalty when they sell Rambus chips. The company had a successful initial public offering in 1997, and its stock price rose in 1998 with endorsements from Intel, Compaq Computer, Dell Computer, and others.
Glaskowsky said there are several causes for the defect. "I wouldn't blame Intel solely for this," he said. Other sources, though, said the problem lies with Intel's 820 "Camino" chipset, the set of chips that allows a computer's CPU to talk to memory and every other part of a computer system. The 820 is the first chipset that allows Rambus to be used in PCs.
Intel didn't comment on whether there will be any changes to the scheduled debut of the 820 but as recently as two days ago said the debut would go ahead as planned.
Glaskowsky said that any system with three Rambus memory slots "isn't going to be shippable." However, another source said: "Most people are going to go ahead and ship with the bug," then update the computer innards when new parts are available.
Glaskowsky estimated that between 100,000 and a million systems already have been built with the defective parts.
If the supply of electronics using the 820 chipset is delayed, it could hamper the arrival of systems based on a fancy new Pentium III chip code-named Coppermine, said Insight 64 analyst Nathan Brookwood. "If this means you can't have 820 platforms out until mid-December...that would be a real loss," he said. "The Coppermines are really dynamite products."
Strained relations
This problem, combined with the earlier three-month delay, has "strained relations" among computer manufacturers, Intel, and Rambus, Glaskowsky said. In advocating Rambus, Intel told computer makers "'You will do this if you want to be our friend,' and they did. June to September was pretty significant to [computer manufacturers], but at least they had some heads-up on that," Glaskowsky said.
Despite the hurdles, many analysts and computer makers still back Rambus in the long term. Rambus addresses the problem of satisfying a CPU's appetite for data stored in a computer's memory, a problem that's only getting worse as CPU speed improvements outpace memory speed improvements.
"I don't think anything is wrong with the technology as such. The promise with Rambus is that it has huge bandwidth and can do a lot of things regular [memory] can't do," Glaskowsky said. "This is merely the latest in a series of delays."
Computer manufacturers discovered the problem in machines being tested off the assembly line, Glaskowsky said.
Sony introduced its first Walkman supporting digital music downloaded from the Internet this evening, a development that could profoundly influence the direction of the nascent business.
The move, which was largely unexpected at this time, gives Sony a potent weapon by combining one of today's hottest digital technologies with a consumer device that has changed the way people listen to music since its introduction in 1979.
The electronics giant debuted the new personal stereo in Japan yesterday but reserved the major fanfare for an event in New York, where Sony celebrated the 20th anniversary of the Walkman.
The new Walkman, which features Sony's "Memory Stick" technology, was introduced alongside other new portable music models. Smaller than a piece of chewing gum, the Memory Stick is a storage medium competing with memory flash cards for dominance in electronic devices, such as PCs and digital cameras. It is expected to arrive in U.S. stores in January and retail for about $400.
Analysts believe that the new Walkman's design represents the direction most consumer electronics makers will take with devices that download digital music, at least in the near term.
"The small player-size and ruggedness that is enabled by solid-state media lends itself well to portable players," International Data Corporation analyst Kevin Hause said. Lightweight designs also make sense because most players must be hooked up to PCs for downloading and storing digital music, he said.
The next-generation Walkman furthers Sony's strategy of melding all its entertainment and electronics properties, from content to hardware. That philosophy has its roots in the company's purchase of Hollywood studios and record labels dating back to the mid-1980s.
For the budding digital music scene, the new Walkman marks an important endorsement coming from one of the best-known brands in the consumer electronics industry. At the same time, however, it could pose a major threat to rival products such as Diamond Multimedia's popular Rio player.
Although analysts expect the digital music player market to explode, it is still relatively small. PC Data reports only about 125,000 units sold this year, mostly by Diamond.
"It's hard to create a market all by yourself," PC Data analyst Stephen Baker said. "I'm sure, in one sense, Diamond doesn't want competition. But right now it's hard for consumers to find MP3 players, because there has been only one."
The portable digital music player market is expected to grow to 6.67 million units in 2003, up from 62,000 last year, according to figures from IDC. Those estimates, however, did not reflect the possible impact of Sony entering the digital music market.
Creative Labs recently introduced its first portable digital music player and other consumer electronics companies, such as Philips and RCA, plan similar devices.
"Certainly Sony coming in helps legitimize the market," Baker said. "Sony is also an electronic company and recognizes a good opportunity to get its name out there."
In addition, the well-known Walkman brand could be a big boost for the players, which until now has confused some consumers with technical terms like MP3.
As a music producer, Sony has been part of the copyright debate surrounding digital music, which typically is available for free and often in the MP3 format.
Owners of Sony Vaio computers will be able to download digital music to their PCs and transfer it to the Memory Stick, which is loaded into the MP3 Walkman. Memory Stick is available with up 32MB storage capacity. Sony plans to introduce the storage medium to more than 30 consumer electronic devices during the coming months.
Sony had initially hoped to sell the new Walkman during the holiday season, but a sales representative for a national electronics chain said today that he doubted that the device could be shipped to retailers that soon.
Sony delayed moving into the digital music market because of the copyright debate surrounding MP3-encoded music. IBM and Sony had been developing a pirate-proof means of distributing music over the Internet.
Sony would not comment on speculation it would introduce the pirate-free format with the new Walkman.
Three men attempted to auction 500 pounds of marijuana on eBay Tuesday night until company officials pulled the plug almost a day after the sale began.
The sale began roughly 8:40 p.m. PT on Tuesday night and ceased sometime 21 hours later, according to a screenshot on AuctionWatch.com, which first reported the story.
A spokesman for eBay confirmed that the auction was live for about 21 hours before company officials were notified. They quickly shut the site down thereafter, according to eBay spokesman Kevin Pursglove.
The three auctioneers, who appeared in a photograph next to numerous plastic bags filled with what looked like marijuana, claimed in a written description that the drugs were "Holland's Best." Seven people had made bids that had reached $10 million by the time the auction was closed, according to AuctionWatch.com.
"We immediately notified the authorities," Pursglove said. "I can tell you that we will cooperate with law enforcement and help them with prosecution."
This latest incident comes at a time when eBay is striving to take an aggressive approach to barring unlawful sales on its site.
Earlier this month, in separate incidents, eBay executives shut down auctions that claimed to be selling a human kidney and an unborn baby. Federal law prohibits the sale of human organs.
Though Pursglove declined to say what law enforcement agency eBay contacted, a spokesperson for the Drug Enforcement Agency said officials there are planning to crack down on drug sales over the Web.
"This is something we would be very interested in," said Jocelyn Barnes, spokesperson for the San Francisco DEA office. "We would start an investigation. We've heard of things like that coming up on these sites and have started to take a look on how to investigate. We do aggressively pursue those avenues."
Presidential candidate Sen. John McCain doesn't want the Net bled to death by tax collectors--not now and not ever.
While a congressional commission studies Net taxation, McCain (R-Arizona), who is chairman of the Senate Commerce Committee, has introduced legislation to make a moratorium on "discriminatory" Net taxes permanent.
The taxation debate is critical to the Net industry, especially the e-commerce sector, which is expected to rake in $1.3 trillion by 2003, according to Forrester Research. McCain said his bill would prohibit sales and use taxes on e-commerce transactions.
"Simply, this bill would make permanent the moratorium on sales and use taxes for e-commerce, and would encourage the administration to urge our world trading partners to do the same," McCain said on the Senate floor while introducing the bill.
Specifically, the bill amends the Internet Tax Freedom Act. That bill set up a national three-year "time out" that prohibits the nation's 30,000 tax jurisdictions from passing unfair sanctions on Net access, services, and sales, and "grandfathered" tax codes in effect before October 1, 1998.
"The discussion includes not just Internet sales or even catalog sales, but all of the ramifications of taxing sales of goods across state and international boundaries," McCain said on the Senate floor.
Several cooks in the kitchen
The 19-member Advisory Commission on Electronic Commerce is charged by Congress with examining the effects that taxes have on the e-commerce sector, as well as brick-and-mortar retail businesses and local governments' ability to collect taxes on Net sales. The panel is expected to issue its final report to Congress by next April.
A consensus among the panel is not expected to come easily because it represents a wide range of stakeholders from AT&T, America Online, the state of California, an anti-taxation consumer group, and local and state lawmakers.
Some state and local officials want to maintain their ability to tax Net services, and won't take kindly to McCain's bill.
The National Governor's Association, for example, wants to see a sort of Net "flat tax" system put in place for e-commerce sales.
"The Governors have called for the development of a twenty-first century sales tax that can achieve this fairness for all forms of sales: Main Street, mail order, and Internet. A streamlined sales tax with simplified compliance requirements will ensure that states are prepared to support the global electronic marketplace of the next century," the NGA said in a policy statement.
But McCain, for one, is not going to wait for the congressional panel to hammer out all of these issues.
"I think it is important to move forward on ensuring that the default position, absent a consensus proposal, is not to lift the moratorium, but to place the burden of proof on those advocating taxation of e-commerce," he stated.
SEATTLE--Microsoft president Steve Ballmer said he thinks technology stocks are overvalued, including the shares of his company, the world's largest software maker.
"There's such an overvaluation of tech stocks it's absurd," Ballmer said at a conference of the Society of American Business Editors and Writers. "And I'd put our company's stock in that category."
Ballmer said a "gold rush" mentality had pushed technology stock prices above their value. "In a way, it's a bad thing for the long-term health of the economy," he said. "Anything that's false is bad."
Microsoft stock fell on the news. Shares of the Redmond, Washington, software company dropped 2.44 to 93.63 in late trading. It was the second-most active stock in U.S. trading, with 25.5 million shares changing hands.
This isn't the first time that Microsoft executives have warned about the rise in its stock, which has climbed 65 percent in the past year and is up more than 13-fold in the last five.
In January 1997, former chief financial officer Michael Brown wondered aloud to analysts why the company's price to earnings multiple was expanding, even as the company's growth was slowing. At the time, the company's stock traded at 46 times earnings of the previous 12 months. Today, that multiple is 68.
Some financial analysts agreed that the stock prices of many computer and Internet companies had exceeded their true earnings potential.
Cappuccino with your stocks?
"I think there's reason to believe that tech stocks are
getting a little frothy," said Bill Epifanio, a J.P. Morgan
Securities analyst with a "buy" rating on Microsoft.
Ballmer's comments are nonetheless not likely to end the rise in technology stocks, analysts said. The Standard & Poor's computer software index has risen 56 percent in the past year and more than sixfold in the past five years.
Ballmer "is probably right, but I don't think his comments are going to bust a trend," Epifanio said. "There's a lot of positive momentum in this market."
Some analysts disagreed with Ballmer's assessment, saying that investors were betting, often correctly, that technology stock prices were rising as demand increased, and that demand would continue to rise.
"The question is, are we going to get acceleration in the spending cycles that are going to drive these values?" said Elias Moosa, a communications equipment analyst at Thomas Weisel Partners in San Francisco. "I think we're going to see it."
Driving down the value
Ballmer said the high stock valuations, which push up the
compensation of the executives of these technology companies
who are often paid in stocks and options, made it harder to hire good people.
He also said that, by issuing stock, companies then left much of their compensation decisions to investors, who pushed up or drove down the value of the companies' stock.
The news media contributes to the problem by portraying the technology industry in terms of a "gold rush," he said.
"The story that gets written is, 'Isn't it great to live in California in 1849, I mean 1999,'" Ballmer said.
At a later Seattle event for Microsoft's MSN Web properties, Ballmer reiterated his opinion about tech stocks' valuation.
"We've said for a long time that we think our stock looks very highly valued," Ballmer said in response to a question about his earlier remarks. "I think our stock, and other stocks, are highly valued relative to any other metric in any other industry.
"I think it's bad whenever reality gets so out of line that you get distortion," Ballmer went on to say, in reference to the run-up in technology stocks generally. "That's my personal opinion. My opinion is that we are in a gold rush mentality."
"I love our company. It's a wonderful company. I love my stock, and I don't sell my stock," Ballmer said. "Nonetheless I do believe the things I said to that other group."
News.com's Paul Festa contributed to this report.
Copyright 1999, Bloomberg L.P. All Rights Reserved.
Hewlett-Packard, trying to raise the profile of its data storage products, unleashed a swarm of 22 products today in an attempt to better tap into a growing market.
Sales of data storage devices bring HP many billions of dollars in revenue each year, but "it's a secret inside of HP," said Duane Zitzner, head of the HP division that includes low-end storage and PCs in an interview. "We're trying to ratchet up the communication."
Data storage, for years a necessary but somewhat drab part of corporate computer networks, has been coming out of the closet as computer companies realize just how much money it earns. Some analysts estimate that when a computer company sells a storage system along with a higher-profile server computer, the storage system still accounts for half the revenue.
"I personally think that storage will become more of an entity to be considered in and of itself than it has before," said Illuminata analyst John Webster. "It's part of the evolution of storage moving out from behind the server."
However, that profit margin may not stay as fat now that companies such as HP, IBM, Compaq Computer, Sun Microsystems, EMC, and Dell all move to sell more storage and competition gets fiercer.
But with the Internet and the spread of computers in general, there's room for a lot of growth. "The world is becoming more and more digital," Zitzner said.
A new storage appliance from HP
Among HP's new products are drives that can create DVD disks, new tape
libraries for backing up data, and a bigger magneto-optical disk system for
customers who need to archive data on disks that last decades. But an
interesting new direction for HP is a special-purpose file server that HP
says is cheaper than general-purpose servers.
The HD Server 4000 holds as many as 90 gigabytes of data and costs about $8,000 in its most expensive configuration, said Todd Owens, a marketing manager for HP's information storage group.
The devices, as previously reported by CNET News.com, aren't as fast or as specialized as the much more expensive products from Network Appliance, but they are designed to be more powerful than the low-priced storage servers Quantum obtained with its Meridian Data acquisition in May.
"This might be a little more forward-thinking a product than it appears to be," Webster said of the new HP storage server. "Little products like this have a funny habit of growing up."
The file server fits into a category called "network-attached storage," or NAS, the small-scale devices that plug into a network to easily expand file storage capacity. Market research firm International Data Corporation projects that storage market will explode to $5.1 billion in 2003.
However, unlike the servers from Quantum and Network Appliance, HP's products only can fit into Window NT networks, Owens said. Quantum's servers can plug straight into Windows, Unix, Novell, or Apple networks, said Quantum marketing vice president Jeff Hill. Network Appliance's products are well-adapted for Unix networks.
HP will add support for Unix and Novell environments in the spring, Owens said.
Some analysts believe that special-purpose "server appliances" threaten the revenues computer makers earn from general-purpose servers, but Owens said he doesn't think that's likely in the case of the HD Server.
"Why pay for the license [of general-purpose server software] just to get an electronic file cabinet?" he asked.
Internally, the HD Server itself runs a stripped-down version of the Unix operating system, Owens said.
Intel has added to its communications chips stable, buying a piece of Stanford Telecommunications and furthering the chip giant's lofty goals in the non-PC realm.
Intel agreed to buy the Telecom Component Products Division of Stanford Telecommunications for an undisclosed sum in an all-cash transaction. The Sunnyvale, California-based division provides chips for cable modems, TV set-top boxes, and broadband wireless equipment.
The deal, along with the recent acquisition of Level One and other moves, puts Intel deeper into competition against the likes of Motorola, IBM, Lucent Technologies, and Broadcom.
The dominant PC chipmaker is clearly gunning for a significant role in the growing market for chips that power communications equipment. The Stanford deal marks Intel's tenth acquisition in that sector in the last two years.
The moves are borne out of simple math. To continue to grow at its historically fast rates, the company has to boost its presence in other markets. Analysts have pegged growth in the communications chip market at a 25 percent annual rate, compared to estimates of around 15 percent this year for the PC market--a market where chip prices have been rapidly falling.
So far this year, Intel's financials reflect the changes in the PC market. In the first half of 1999, revenue from the Architecture Business Group--the main PC-focused group--grew 12.6 percent, from $10.7 billion to $12 billion. The other business groups combined are still just half the size of the main group, but revenue grew from $1.3 billion to $1.8 billion, a 38 percent increase over the same period a year ago, with obviously a lot more room to grow.
Analyst Mike Wolf of Cahners In-Stat Group said Intel's investment today helps round out its offerings in networking chips and also helps the company continue its push into the home market. Intel has invested heavily in developing home networking kits that allow consumers to link their PCs together to share files and Internet connections.
"Their acquisition strategy has been aggressive for '99, and they're filling a lot of holes," Wolf said. "In terms of access to the home, [today's purchase] is a big piece of the puzzle."
Intel's purchase is the chipmaker's second effort in the broadband access market, said Greg Lang, vice president of Intel's networking interface division. Intel recently announced an alliance with Cisco to build technology that connects digital subscriber line (DSL) access to PCs, he said. DSL is a high-speed Net technology that uses ordinary phone lines.
"On-ramps for Internet economy"
"The mission is to build the on-ramps for the Internet economy, and DSL and cable modems are two key ones for the home and small business," Lang said.
Lang predicted Intel should do well in competing against Broadcom and Lucent Technologies, as well as Texas Instruments, in the chip market for cable modems.
"There's enough newness in the market that there's opportunity for us to become a leading provider," he said.
Intel--which is creating a new cable modem division--will also build broadband wireless technology, which allows homeowners to get high-speed Internet access without the need for wires. In the future, homeowners can install dishes on their rooftops and communicate with a central dish elsewhere to get Internet access.
Allen Edwards, former vice president and general manager of Stanford's telecom component products, will become co-division manager of the new cable modem division.
Just as important, the purchase adds pieces to Intel's previously announced strategy for creating the blueprints to a family of networking chips, called the Internet Exchange Architecture, or IXA. Intel is hoping to distinguish itself from competitors such as IBM by offering a programmable chip, which allows corporate users to add or update functions by changing software, not the processors.
Bob Merritt, senior analyst with Semico Research, said building on-ramps to the Internet is a good idea, because increasingly, the communications market is driving new technology developments, not the PC market. "You have to go into this market to have a view of where the technologies are going to be," he said.
Yet there is a hidden danger. Intel's purchases are taking them farther away from what has made them the largest chip company in the world--its manufacturing expertise, he noted.
Performance improvements in communications chips rely less on manufacturing prowess and more on intellectual property. Melding the two together will be a challenge for Intel, Merritt said.
IBM, meanwhile, today touted the introduction of a new chip "core" for communications chips, a basic building block to which customers such as Cisco and 3Com can add custom components as needed. While Intel is touting programmability as an advantage to its strategy, IBM is relying on pure speed. The new chip runs at up to 550 MHz, which is almost as fast as some desktop PC processors, and is built using copper wiring instead of aluminum for better performance.
The 30 employees from Stanford will join Intel's Network Communications Group upon completion of the merger.
The Stanford division became available for purchase as a result of Newbridge Networks pending purchase of Stanford Telecom for $490 million in stock.
SEATTLE--In an unexpected move, Microsoft today said it will raise rates for its MSN Internet Access service by $2 per month.
Recent press reports had fueled speculation that Microsoft would dramatically lower MSN rates or provide the service free to chip away at online service market leader America Online's market share.
Jon DeVaan, vice president of Microsoft's consumer and commerce group, did not specify a date for the rate hike. But MSN product manager Deanna Sanford said it would come within the next few weeks.
The move comes on the same day Microsoft detailed plans to jump-start its MSN Internet efforts, introducing a portal aimed at small businesses and beefing up its search function.
MSN subscribers who have already signed up for the $19.95 monthly price will be able to keep that rate for the remainder of their contract, Microsoft said.
Microsoft justified the price increase, which matches the increase AOL implemented early last year, by saying that customers will get their money's worth.
"We think customers are most interested in the speed and reliability of access, and we are committed to continuing to deliver a great service," Sanford said in an interview with CNET News.com.
One of those additional services, called Internet call-waiting, lets users with one phone line know when someone is trying to call them and allows them to accept the call, route it to another phone number, or let it go to voice mail.
MSN also will begin offering toll-free support, available 24 hours a day and seven days a week. With the new version, users of MSN Internet Access will start seeing MSN.com as their default start page, replacing the current proprietary user interface, the company said.
Analysts questioned the logic of raising prices, particularly when MSN is offering discounts through partnerships, such as its deal with Costco.
"It's interesting to see someone aside from AOL raising the price when so many others are discounting the price or offering it free," said Barry Parr, analyst with IDC. "But price is not really the issue here. The real question is how you differentiate an ISP. Unless they start buying ISPs, I don't see how they're going to expand."
The ISP market today saw a significant move toward consolidation, as Earthlink and Mindspring announced they would merge, vaulting past MSN to the No. 2 spot in terms of users, with about 2.8 million subscribers.
MOUNTAIN VIEW, California--Intuit, the top maker of personal
finance software, said chairman Bill Campbell will become acting chief
executive, replacing Bill Harris, who resigned.
Campbell, 58, was Harris's predecessor, and became chairman in May 1998 when
Harris was promoted to CEO from executive vice president. Harris, 43, who
will remain on the board, said he wants to pursue more entrepreneurial,
hands-on work.
Intuit shares have doubled
since Harris became chief executive of the
Mountain View, California-based company, which has been shifting its
business to deliver Web-based software and electronic-commerce services.
"Intuit is doing remarkably well. It's a good time for me to think about
doing the kinds of things I like to do, a more hands-on role," Harris said
in an interview. "I like to get my hands dirty and get back into the
creative aspect of building businesses."
Harris will work with Campbell and the board in the search for a new chief
executive.
Intuit fell 2.69 to 100.56. It announced Harris's resignation after the
close of U.S. trading.
Copyright 1999, Bloomberg L.P. All Rights
Reserved.
CDNow and Columbia House will be marching to the beat of a new chief executive once their proposed merger is completed. But it remains an open question whether CEO Scott Flanders can come up with the big hit needed to lift CDNow's stock out of a rut in the face of increased competition.
Over the past year, CDNow has watched its stock slide from a high of 39.25 as Amazon.com, Buy.com, Virgin Megastores, Barnesandnoble.com, and others invaded its online music retailing territory. The stock closed yesterday at 12.5.
Flanders was named yesterday to lead the planned integration of CDNow and Columbia House and will become chief executive of the new and yet-unnamed public company. CDNow's current chief, Jason Olim, will serve as CEO of the new company's online retail division, while Richard Wolter, chief of Columbia House, will head up club operations.
Flanders, the former president of computer and reference book publisher
Macmillan Publishing, joined direct-marketing music and video club Columbia
House after serving as chief executive and chairman since 1998 of wireless products and services firm Telstreet.com.
Although some analysts were surprised by the appointment of Flanders, who they consider a relative unknown in the online business, some were quick to assert that Flanders's strength may lie in managing the new company's relationship with its parent companies, media powerhouses Time Warner and
Sony.
With the breadth of products controlled by the media companies,
analysts agreed that CDNow could put up a strong battle against its
encroaching competitors in a market that is expected to grow to $2.5
billion in 2003 from $374 million in 1998, according to Forrester Research.
Time Warner said Flanders was unavailable for comment because of a
Securities and Exchange Commission-mandated quiet period.
In July, CDNow entered into an
agreement with Sony and Time Warner to merge with their jointly owned
Columbia House. At the completion of the merger, Sony and Time Warner will
each own 37 percent of the new public company, while existing CDNow
shareholders will hold a 26-percent stake.
The merger with Columbia House is CDNow's second major merger since it went
public in February 1998. In October 1998, CDNow agreed to merge with N2K's Music
Boulevard in an attempt to reverse its falling stock following Amazon's entry into the online music market.
In the first six months of selling music online, Amazon nearly matched the total annual sales for CDNow last year. This year, analysts said they expect Amazon to grab the lead completely.
Powerful backers lend some weight
Sony Music and Warner Music, divisions of Sony and Time Warner,
respectively, are two of the "Big Five" record companies, along with BMG,
EMI, and Universal Music. In addition, Sony operates movie studio Sony
Pictures Entertainment and television firm Columbia TriStar, along with its
electronics and games businesses. Time Warner also holds several
entertainment interests including Warner Bros. television and movie
studios, HBO, and the Turner Entertainment Networks.
"My gut reaction is that CDNow has the potential do as well as Sony and
Time Warner let it do," said Malcolm Maclachlan, an analyst at
International Data Corporation. "They control lots and lots of music
content, and they could have all kinds of cross promotions."
CDNow's Olim said that although the company is generally thought of as an e-commerce company, it also raises revenue in other ways.
"We are the second-largest e-commerce company on the Web, but we are
actually, as of now, one of the top 50 publishing sites in
[advertising] revenues," said Olim, adding that the company
generated about $2.5 million in ad revenues in the first and second quarter
this year. "That was done with Microsoft, the Gap, and others paying to
sponsor our site and editorial content."
Major recording companies are beginning to embrace online music
downloading, reversing their earlier hesitation to do so. And today Sony will unveil the first Walkman
supporting music downloaded from the Internet, marking the company's
further commitment to the Net as a distribution channel.
"Right now [downloadable music] is more for promotion," said Olim.
"My gut tells me that it will be awfully soon that we will start seeing
significant sellable download products."
It is exactly these kinds of potential gold mines within its media giant
parents that Flanders will have to exploit.
"[Flanders] strikes me as a manager who would be a steward," said
Maclachlan. "[Time Warner and Sony] have all these different divisions that could relate to what CDNow does, but their motivations might not always match up."
Warner Music Group's chief executive Roger Ames yesterday in a statement
promised Flanders the "full measure of Warner Music Group support."
Mail order: the 800-pound gorilla?
Analyst Martin DeBono of Gomez Advisors said that CDNow must effectively draw Columbia House's nearly 16 million members to its site.
"If CDNow could get a 10 percent to 15 percent conversion rate, they could double their number of customers, which could double their revenues," said
DeBono. Columbia House said it directly distributed approximately 200
million music and video units to its membership base last year.
"CDNow is one of the best sites on the Internet right now for music sales," said DeBono. "[Flanders's] job will be to let people who aren't shopping there, but who are Columbia House members, know about the site."
Olim said that one of the first items on Flanders's agenda will be to come
up with a name for the merged company.
Analysts agreed that CDNow has somewhat outgrown its name given that consumers now look for not only CDs, but also DVDs, digital downloads, videos, and music and film news.
"Obviously we have two powerful name brands," said Olim. "And those are the
brand names we want to leverage."
With media giants Sony and Time Warner watching CDNow's back, most analysts said they see a clear way for the Net retailer to differentiate itself from its competitors. Sony and Time Warner have vast catalogs of music, film,
news, and other content to serve up, giving CDNow an opportunity to be
strongly positioned for its transformation from strictly an e-commerce store to a music and film destination site.
But some analysts see the company leveraging Columbia House's mail-order
strengths in an effort to drive traffic to CDNow for an immediate boost to
revenues.
Play video
There are currently no comments for this post.