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Buy.com Struggles With Online Music

Buy.com Struggles With Online Music

Slim Profits, Increased Competition Make It Hard on Internet Retailer

BY ANDREW SIMONS

Scott Blum’s hopes of building a mini-media empire have hit a couple of snags.

Last week, subscribers of the Buy.com Inc. founder’s music download operation, BuyMusic.com, received an e-mail saying the unit soon would be “integrating” with Blum’s online retail company, Orange County-based Buy.com Inc. BuyMusic.com also closed a Los Angeles office.

BuyMusic, one of the first legal music downloading sites, had been run as a separate company since the service launched last year. Blum operates several Aliso Viejo-based businesses under his Jackson, Wyo.-based holding company ThinkTank LLC, including Buy.com, BuyMusic, BuyTV, BuyMagazine, TechSpace, and BuyServices.

With competitive pressure mounting from other download sites such as Apple Computer Inc.’s iTunes, last week’s entry Wal-Mart Stores Inc., and the pending entry of Microsoft Corp., companies that download music exclusively, such as BuyMusic, face uncertain times, industry analysts say.

“With the expense of running two Web sites, it just makes sense” to fold the operation into Buy.com, said Michael Goodman, an analyst with Boston-based Yankee Group.

Buy.com officials weren’t available for comment.

Slim Profits On Music

BuyMusic sells music via the Internet by the song or entire album. Prices range from 99 cents to $1.30 a song. A customer signs up for a free membership and maintains credit card details on file with the service. Buyers can browse the site, preview songs, and download songs.

One problem, Goodman said, is the slim profit earned by selling each song.

BuyMusic must turn over about 70 cents per song to record companies for the music rights, and about 15 cents to credit card companies. Marketing costs to BuyMusic are five to 10 cents, with operating costs seven to 13 cents per song, according to Goodman.

The cost of selling music online is something Apple has noted since it started selling digital music a year ago. Apple calls its iTunes music store a “loss leader” , it makes money on sales of its iPod music players. Earlier this month, Apple said about 2.5 million songs a week were being downloaded from its iTunes Music Store.

“The reality is that you’re not going to get rich selling music online,” Goodman said. “Somebody like BuyMusic is going to have a much more difficult time than Apple, which has done a significant job integrating their iPod (device).”

And what about the more expensive songs?

“The problem is that consumer demand craters when you go above 99 cents,” Goodman said. “The reality is they’re probably not selling very many of them.”

BuyMusic officials didn’t respond to interview requests.

BuyTV Also Delayed

The change at BuyMusic comes as another Blum venture has been delayed.

BuyTV , Blum’s television venture that was announced in 2002 and slated to open last fall , has yet to launch.

The TV show was expected to become part of his so-called “direct response network,” in which viewers would be able to order products via phone or the Web and have them delivered within 24 hours.

Blum signed some big names to the advisory board for BuyTV, including Frank Biondi, former chief executive of Universal Studios Inc. and Viacom Inc.; Jeffrey Berg, chief executive of talent agency International Creative Management Inc.; and Bruce Redditt, a vice president at Omnicom Group and former director of defunct Internet advertising company Maxworldwide Inc.

Calls to the company weren’t returned; BuyTV advisory board members weren’t available for comment.

BuyMusic and BuyTV were meant to be part of Blum’s media empire, which was expected to direct Web shoppers to Buy.com, the company’s flagship online retail site. Blum paid $24 million to take Buy.com private in 2002 after it struggled as a public company.

BuyMagazine, which launched in 2002, was Blum’s first move into media. That publication started out as a glossy magazine but subsequently was scaled back to an online version.

Meanwhile, Blum has been tweaking his Buy.com operation as it goes head-to-head with online retailers such as Amazon.com Inc. and electronics stores including Best Buy Co.

“They’ve added some different categories to take a little bit of the focus off consumer electronics,” said Patti Freeman Evans, an analyst with New York-based Jupiter Research.

Toys, books, magazines and DVDs are some of the newer products on Buy.com’s Web site, Evans said.

“The interesting thing about that is if you look at books and toys and computer peripherals, they’re some of the larger categories online but they’re also the slowest growing,” Evans said.

“The market for those products is expected to grow at a 5 percent to 10 percent clip in the next five years, she said.

The growth of new consumers to online retailing won’t be the same as it was in the past five years, Evans said.

“It doesn’t mean they’re not going to grow, but we’re not going to see big 30 percent to 40 percent increases in those categories,” Evans said.

At the same time, Evans said Buy.com had made some positive changes to its site.

“They’ve gotten much clearer in their site presentation and branding,” Evans said. “Buy.com has a pretty decent search functionality. They continue to have strong traffic.”

Buy.com had 10.5 million unique visitors in November, putting it at No. 48 among all Web sites, according to comScore Media Metrix. The site didn’t crack the top 50 in February.

Blum told Investor’s Business Daily late last year that sales rose 12 percent from Thanksgiving through Dec. 24, 2003, vs. the same period a year earlier. Buy.com’s sales rose just 5 percent during the same period of 2001.

Buy.com went through a round of layoffs in 2002 after Blum bought back the company.

Sources said Buy.com and its affiliated companies recently cut some workers. Buy.com spokeswoman Larisa Hall denied there had been layoffs at Buy.com. Jenny Gilcrest, a spokeswoman for the other companies said she couldn’t comment on staffing.

Andrew Simons writes for the Orange County Business Journal.

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