On The Block: CDnow Seeks Deep-Pocketed Savior

Internet merchandising pioneer CDnow Inc., wrestling with a titanic cash crunch, has cast out its lifeline for a well-heeled rescuer. Allen & Co. was assigned the job of finding a buyer, partner, or investor that can get the online seller of music CDs and cassettes out of the hole before its cash runs out in the fall of this year. In the interim, CDnow is trying to buy time by whacking away at marketing expenses – its principal costs – and trying to cut its burn rate sharply. An ideal buyer or investor, said CDnow founder Jason Olim, is someone with “cash on hand.” “The company is going to require additional cash to get to profitability,” he added. “They will be someone who preferably will have access to customers through some kind of marketing capability that we can leverage. Most importantly, they will have an interest in being the No. 1 music destination on the Internet. They will have an interest in music commerce and music content.” Basically, CDnow’s problem is that its business has been growing faster than the cash it generates to finance the expansion. The severity of the Fort Washington, Pa.-based firm’s plight was accentuated by the recent collapse of a planned merger with Columbia House, the direct-mail CD and tape merchandiser jointly owned by Time Warner Inc. and Sony Corp. Olim said that the deal, also brokered by Allen & Co., fell through because Columbia House turned out not to have the cash flow production that would have tided CDnow over. That reflected a slowdown in direct-mail music sales as buyers turned to other merchandising channels, including the Internet. As a going-away present, Time Warner and Sony anted up $51 million – $21 million in cash and a $30 million loan commitment – which was to keep CDnow afloat through September. Olim said that the merger with Columbia House had been part of the CDnow business plan to get to profitability. Instead, he said, CDnow is concentrating on slashing its most expensive marketing costs – “that’s where most of our money goes” – including advertising and couponing while working to improve sales through allied marketers. The aim is to chop expenses by $10 million to $12 million a quarter and reduce the quarterly burn rate to less than $15 million. CDnow is not the only Internet merchandiser to run sharply in the red while its business expands but it is the most visible example of an online retailer in trouble. Olim said that while there probably will be some failures in the business-to-consumer segment, he believes it remains a viable business model. CDnow shares closed March 31 at 3-25/32 on Nasdaq compared with a 52-week range of 3-13/32 to 23-17/64.