CDNow: 3 lessons from Fort Washington-based pioneering 1990s-era online music retailer

It’s been a decade since pioneering online music retailer CDNow shuttered its Fort Washington office.

In honor of the occasion — much of the old team had its 10-year reunion earlier this summer — Technically Philly spoke to former CDNow execs to find out what they learned from the failure of the promising Philly-area startup.

The company, founded in 1994 by brothers Jason and Matthew Olim in their parents’ Ambler, Pa. basement, was a major player in the Philly area’s dot-com scene and one of the decade’s best known websites. By scale, size and impact (having been an online retailer before 1995) it was one of the area’s most successful dot-com era technology startups. It also cultivated local talent — team members landed at firms like GSI Commerce, Monetate and Yellowbook.

The company sold music online, pre-Napster, pre-iTunes. It offered music reviews and recommendations based on a customer’s interests. It was the first online store to sell single songs instead of a full CD, says Jason Olim.

In 1998, CDNow went public with a $342 million valuation. At its height, the company employed almost 750 people, says former CEO and COO Mike Krupit, (three times the number of employees as another regionally-based dot-com poster child, Infonautics) and sold $150 million worth of music a year.

So what happened? A failed merger, an acquisition and finally, Amazon.

“What ultimately killed CDNow,” says Krupit, who joined the company in 1997 and ran it during its last two years of existence, “was the merger.”

CDNow focused all its resources on a merger with Columbia House, Krupit says. So when the deal fell through in 2000, the company was out of money and out of fundraising options.

Shortly after, German media conglomerate Bertelsmann bought CDNow for $117 million, and two years later, it shut down CDNow’s Philly-area office, ceding most of the business to Amazon.

Krupit now runs the Langhorne, Pa. incubator Novotorium. Olim, who lives in New York now, is a stay-at-home dad who also does some business consulting. Members of the team are littered throughout the region (and beyond), but there are reminders of what CDNow got right and did wrong.

Here are three big lessons Olim and Krupit say they learned from their time at CDNow:

• Realize when the entrepreneur has to become the CEO. Olim says he learned one of his most important lessons when the company was only two years old, with about 20 employees. While the company was working on a major site redesign, Olim tried to help with a minor operation — resizing album images. He said his brother got upset and told him: This isn’t your job. As an entrepreneur, Olim says he was so used to being part of every little office operation that it was hard to let go and realize that his new role was to make the company successful. He says he wished he figured this out sooner so the company could have grown faster.
• Don’t be afraid to veer from the original mission. Krupit and Olim both say CDNow should have diversified its product and sold more than just CDs. “We should have gone head to head with Amazon,” Krupit says. The company discussed it, but Krupit says it didn’t want to stray from its focus on music. CDNow wanted to stay true to our original mission, Krupit says. As a result, Amazon has become one of the country’s most viable internet businesses. CDNow withered and died.
• Know the industry you’re dealing with. The music industry was inflexible and resistant to change, so it wasn’t the right time to innovate, both Krupit and Olim say. “We failed to get recognition in the music industry as a game changer because they didn’t want the game to be changed,” Krupit says. Olim says the industry was also unreasonably competitive because of its allure. “People just flock to the businesses because it’s attractive,” Olim says, and he was no exception. But Olim says he didn’t realize the implications of working in the music industry until it was too late.

Updated 7/31/12 12:42 p.m. We originally wrote that “Olim says he learned one of his most important lessons when the company was only one year old, with about 20 employees,” when in fact, it was when the company was two years old.