CDNow: Is the music almost over?
Accountants for the online music store warned about the company’s current financial state, saying it had "substantial doubts" about its ability to continue operations.
The statements were included in the annual report the company filed with the Securities and Exchange Commission. The filing said that the concerns arose after the CDNow’s (CDNW) merger deal with Columbia House fell through.
Earlier this month, CDNow and Columbia House, a joint venture of Sony Corp. and Time Warner, called off a proposed merger. Instead, the companies agreed to buy $21 million of CDNow stock and give the company a $30 million loan.
An article in Barron’s earlier this month included CDNow in a list of dotcom firms that could run out of cash before next year.
CDNow issued a statement after the Barron’s article ran, saying that the deal with Sony and Time Warner had given it enough cash to run for six more months.
The company also announced a plan earlier this month which it says will cut quarterly operating expenses by $10 million to $12 million.
The cuts look to be necessary. The company has never declared an annual profit, and has racked up $174.3 million in losses since it launched in 1994. Quarterly losses have grown from $9.2 million in the first quarter of 1998 to $25.7 million in the fourth quarter of 1999.
According to the SEC document, the company had $28 million in cash on hand at the end of 1999.
"There can be no assurance that CDNOW will be able to generate sufficient revenues to achieve or maintain profitability on a quarterly or annual basis or secure adequate funding to continue its operations," the filing states.
CDNow’s troubles could be a bad omen for online retailers. Several analysts predicted a sharp fall in these companies’ fortunes after the heady Christmas season ended.
The problems seem to occur in many branches of online retailing. Internet grocer Peapod Inc. (PPOD) said earlier this month it might have to put itself up for sale after investors had backed out of a $120 million deal. The deal fell through following the resignation of the company’s CEO.
Earlier, software seller Beyond.com (BYND) and department store Value America (vusa) have announced cutbacks and restructuring moves, while fashion retailer Boo.com laid off 10 percent of its employees.
CDNow’s stock had dropped into the single digits following the merger announcement, and closed yesterday at $5 1/16, down from a 52-week high of $23 17/64.
So what hapenned at CDNow? Analysts said that the company squandered a first-mover advantage and failed to adapt to changing markets.
"They did do some things well, and they did do some smart things," said Ken Cassar, analyst at Jupiter Communications in New York. "Fundmentally they didn't adapt once it became (clear) that there were fundamental flaws (in their business), they didn't accommodate and change."
Cassar pointed out that the retailer continued to outsource its fulfillment processes, which allowed any new competitor to get access to the same products at the same price.
"So when Amazon wanted to sell CDs they were able to go and strike the same deal, and have everything CDNow had in addition to a large customer base," Cassar said.