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CDNOW OR NEVER
Company's Business Plan Questioned By New Rival
Way to hit a guy when he's down.

CDNow—whose stock price has been in a free fall after a series of dire media prognostications (see 3/31 story)—is now taking it on the chin from potential competitors.

Leonard Saffir, CEO for soon-to-be-launched, Boca Raton, FL-based CelebrityStores.com—which will be selling merchandise linked to the stars of films, TV, Broadway, music and sports—took his own shot at the staggering company.

"The CDNows and other e-commerce companies of the late ‘90s were built around wacky business models," he said, pointing to the company's spending $26 million—approximately half of its fourth quarter '99 sales of $53 million—on marketing. "That's a formula for disaster. You can't do that and make money selling low-margin products. Amazon found that out quickly."

Something Wall Street is only discovering now.

CelebrityStores.com plans to bundle low-margin CD sales with high-margin merchandise and higher end collectibles.

Meanwhile, Time Warner announced it may have to take a "significant" charge to reduce the carrying value of its 50% interest in Columbia House, which it jointly owns with Sony Corp. The company was supposed to merge with CDNow last month, but the deal was called off by new Columbia House Chairman/CEO Scott Flanders who didn't like CDNow's business model or prospectus. Although Columbia House is the #1 U.S. music and video retail club, its declining operating performance has Time Warner and Sony looking for alternative ways to improve business. Columbia House generated about $1.4 billion in revenue in 1998 and $100 million in EBITDA. But Flanders is said to be in talks with rival BMG Record Club about a possible merger and a new major Internet play for the combined companies.

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