Hitting the right notes

Jason and Matthew Olim began an online music store in a basement four years ago. Now worth $23m, they've become an Internet legend.

When Tony Blair applauded leaders of the e-commerce revolution in his address to the Commons for the new session of Parliament, he probably had people like Jason Olim in mind. Four years ago, in one of those moves that's become Internet legend, Olim and his twin brother Matthew launched the online music store CDnow from their parents' basement, with an investment of $20,000. At the time there were few commercial ventures on the Internet, and no success stories: Amazon bookstore didn't open for another year. In its first year CDnow sold $2m worth of music. In the first half of 1998, sales exceeded $23m.

CDnow has secured rights to be the exclusive music seller on top sites such as Yahoo and Lycos, and a recent merger with competitor N2K increased its share of the online music market to about 45 per cent. With initiatives in place to increase its international visibility and incorporate new technologies such as digital distribution, the still-young company looks like an important player - in both the online and off-line music retail industries.

But money wasn't much on the brothers' minds when they conceived the company, says 29-year-old Olim, in London last week to promote the launch of CDnow's UK website. Their main goal, he says, was "to build a better music store". As Olim describes it, there was an gap in the music retail market that badly needed fixing. He remembers a frustrating visit to his local record store. A friend had loaned him a copy of Kind of Blue, and he was looking for more Miles Davis. The advice he got from the store staff was to look in the jazz section.

"Retail stores have lost sight of what they're really doing," he says. "Good music stores are the ones that help you learn, because they realise that their mission is not to make money off of selling the album. It's to get you to be a happier person because you've found music that makes you happy."

Olim, who was working as a software engineer, realised that he could use the Internet to connect customers to music. "I was sitting in a bar one night and it dawned on me that I could solve my Miles Davis problem. I could put a database of albums together with a database of reviews and make it available on the Internet." CDnow would provide "what people really need - someone who's going to help them find the music that makes them happy. "

On the CDnow website, customers can browse reviews, artist biographies, events listings, buyers' guide, charts and archives such as Rolling Stone magazine. Sound samples are available, so that customers can listen to parts of an album before they buy it. There's a personal shopping service that remembers customers' preferences and makes recommendations for them, and for last-minute Christmas shoppers there are gift certificates that can be ordered and delivered by e-mail up to 24 December. Customers can browse and search the archive of 350,000 CDs, tapes, vinyl records, videos, books and other music-related items in stock. Regular customers can enrol in a frequent buyers' program and earn points towards free products.

Buying itself is easy: customers fill their virtual shopping cart by clicking on the items they want, then enter credit card details. UK customers currently pay US prices, plus shipping and handling.

Olim is especially proud of CDnow's customer service. Representatives can be reached by e-mail or telephone 24 hours a day, are fluent in 12 languages, and they are music experts - DJs, musicians, and die-hard fans.

More than half of CDnow's customers are over 30. Olim explains that the depth of the catalogue and level of expertise is attractive to older customers, who may be searching for eclectic music that is not available on the high street.

Dressed casually, his sprained ankle (a kayaking injury) propped on the coffee table, Olim looks and sounds like a typical Generation-X entrepreneur who's found a way to combine work with his love of music, and is more interested in providing a service than making money. But although CDnow ships to many countries, Olim wants the company become more international.

To do that, CDnow will offer multilingual websites, pricing in local currencies and shipping from local sources. Starting early next year, there will be a UK-specific site with prices in pounds and UK-specific content, such as coverage of local festivals. Already, many European orders are shipped from a warehouse in Holland which contains about 150,000 European titles.

With its purchase earlier this year of superSonic Boom, a custom CD company, CDnow is also moving into the custom compilation market. Customers pick out individual tracks they'd like to have together on an album. CDnow manufactures the CD, prints a cover and ships it out. CDnow has custom compilation agreements with record companies, including EMI, for over 60,000 tracks in total.

The development Olim is really excited about, however, is digital distribution. With digital distribution, customers will download albums directly from retailers such as CDnow onto their computers, then use CD-writers to produce CDs.

However, there are barriers. One is hardware: only a few million people have the CD-writers they need to produce downloaded albums; another is the record companies, who are unwilling to authorise digital distribution, fearing their products will be illegally replicated. But that's already happening, explains Olim. Millions of people have software that allows them to trade music files electronically - and illegally. "The best way to fight piracy is to offer a legitimate alternative," says Olim. "By offering a legitimate digital download which is encrypted , we can reduce piracy and create incremental sales."

And what happens beyond digital distribution? "I don't know. But you know what? We'll be ready when it does come. We'll probably be the ones to figure it out."