business

Storming A Cd Bastille

CDNOW issues a Web challenge to French music retailer FNAC

On a drizzly afternoon in Paris, a 37-year-old Briton named Clive Mayhew-Begg holds forth in a meeting room of the Hotel Bristol, around the corner from the Paris Opera. Mayhew-Begg, the international vice-president for online music vendor CDNOW, has summoned France's digerati, its Webmeisters and portal people, to his improvised offices. He needs help. His company, based in Fort Washington, Pa., and the e-commerce music leader in America, is a newcomer to France.

CDNOW hasn't even got a local address, much less brand recognition. Yet it's taking on a giant--France's preeminent music and bookstore chain, FNAC. With sales of $2.3 billion in 1998, FNAC is a gem in the business empire of takeover artist Francois Pinault.

It could be a nasty fight. Even as CDNOW hurries to customize a French-language commerce site, France's bricks-and-mortar champion is launching a preemptive cyberspace attack. On Nov. 4, FNAC, led by Pinault's son, 37-year-old Francois-Henri, is releasing its new music portal. Pinault pere, insiders say, is giving his son plenty of room to make this cyberforay on his own. Francois-Henri has a $50 million investment budget and 110 Web developers. The site, he vows, "will be on a par with Amazon and CDNOW."

GLOBAL FRANCHISE. The fray in France's music business is a harbinger of battles to come across Europe. American e-powers, from eBay Inc. to Priceline.com Inc., have soared to giddy heights in the stock market on the hopes that they will establish global franchises on the Internet. For this, they must win in Europe, a $5.3 billion consumer e-market with potential to grow as big as America's. The key, especially for music vendors, is establishing early leadership. Of the $14 billion a year Europeans now devote to music, less than 1% is spent online. But change is coming fast. Within five years, analysts expect music buffs on both sides of the Atlantic to be downloading billions of dollars worth of music directly from the Net. And they'll buy, naturally, from the Web sites they know best.

But the European market fields a host of obstacles. Linguistically and culturally, it's splintered. What's more, U.S. champions face local powers with strong brand names, faithful customers--and the means to defend Net markets. Already, Amazon is tangling in Germany with publishing giant Bertelsmann, while Yahoo! and America Online slug it out in the portal business with market leaders such as Dixon's FreeServe in Britain and France Telecom's Wanadoo. "Everybody's coming to Europe in the next year," says John Palmer, chief executive officer at LetsBuyIt.com, a Swedish e-commerce site.

CDNOW has plenty of advantages as it wades into Europe. It is among the pioneers of e-commerce and boasts 2.5 million customers. Like many other e-commerce companies, CDNOW has not yet cleared a profit; last year it lost $43 million. But the company is heading for $200 million in sales this year. And it's anchored in the $13 billion U.S. music market, where best-selling CDs are released months before they hit Europe.

Just last summer, Sony Corp. and Time Warner Inc. spent an undisclosed sum buying a controlling stake of 37% each. Barring regulatory problems, the deal should go through in December. That will enable CDNOW to offer international customers the newest releases at bargain prices and hook up cybershoppers to videos and interviews with top musicians. And in taking on FNAC, CDNOW is adding bargain shipping rates to its steep discounts in the expensive French market. "That's one of our advantages," says Mayhew-Begg, a former Netscape Communications Corp. executive in Asia. "The U.S. has the lowest CD prices in the world."

But the younger Pinault has plenty of synergy on his side, too. His strategy centers on FNAC's 51 stores--all on prime real estate--that draw 10 million loyal customers a year. While barely 10% of France's population is online, more than three times that proportion of FNAC customers already surf the Web. Since it began offering free Internet service last May, FNAC has built up an online subscriber base of 100,000. As Pinault sees it, the Internet will simply extend the popular store into millions of French homes. "The Internet is a dream come true," he says.

The battle in France, as elsewhere in Europe, may well boil down to culture: Will cybershoppers want an extension of the store down the street or a taste of America? Mayhew-Begg is tilting toward an American offering. For France and Germany, CDNOW is adding local language "gateways" to the U.S. site. French shoppers can make purchases in French, spending French francs. But if they want to read the album notes on, say, Santana's new CD, they'll need to know English. This approach has the added benefit of reducing Mayhew-Begg's development costs--which he won't disclose.

SACRILEGE. CDNOW's strategy verges on sacrilege in multicultural Europe. But Mayhew-Begg maintains that American e-commerce companies enjoy technical advantages. They've learned how to hunt customers on the cheap. The key: Understanding the pattern of mouse clicks that leads from browsing to a purchase. Pinault admits as much. "They're two years ahead," he says. He calculates that for each customer who clicks into FNAC's current Web site from Yahoo! and makes a purchase, 49 others click in, browse, and leave. This means he's paying the portal a stiff $100 for each paying customer.

A low-cost pipeline to customers should grow, he thinks, as the retail group that includes FNAC, the $17.7 billion Pinault-Printemps-Redoute, builds a Web presence. The group, whose leading shareholder is Francois Pinault, announced in October that it will connect some 60 of its e-commerce sites to a new, all-purpose portal called Mageos.Com. Says PPR Chief Executive Serge Weinberg: "The balance of our stores and these networks is crucial to our success."

Mayhew-Begg questions any strategy of linking Web sites to bricks-and-mortar stores. "They'll never want to cannibalize the store sales," he says. But Pinault intends to use the stores in some unusual ways. While Web merchants such as CDNOW scrounge for warehouses in Europe, he's going to convert his stores--even his Champs Elysees showpiece--into Web inventories. The crowds don't begin to pile in until lunchtime, he explains. In the early mornings, store personnel can fill online orders. Whoever prevails in the coming cyberbattle, Pinault's exclusive FNAC stores are sure to draw more French shoppers into a lively new cybermarket.

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