June 16, 1998

MARKETING IN THE CYBER AGE (Part 1)

Edited by Dennis Berman

BUSINESS BUILDERS SERIES: MARKETING FOR SUCCESS

Presented by the MIT Enterprise Forum of New York City

In this latest installment of the MIT Enterprise Forum of New York City Inc., speakers focused on the rigors and competition of online marketing in a session titled "Marketing for Success." BW Enterprise is pleased to provide excerpts from the meeting.

Four marketers tell us how their companies defined themselves at various stages in their growth, what images they sought to build, what markets they targeted, and what techniques they used to implement their marketing strategies.

Panelists

Frank Palantoni, former general manager, New Ventures Div., Dannon Co. North America.

Rod Parker, senior vice-president for sales and marketing, CDnow (CDnow.com), billed as the world's largest music store.

Lou Weiss, senior vice-president, AirMedia (www.airmedia.com). AirMedia is the first wireless Internet network. It connects offline PCs to the Internet and serves as a push-broadcasting real-time news service.

Jay Friesel, executive vice-president for sales and administration, 24/7 Media (www.247media.com).

Moderator Jason Chervokas, co-editor and co-publisher, @NY, a magazine reporting on New Media in New York's Silicon Alley.

ROD PARKER (CDNOW): I'll give you an overview of what we are all about, a little bit about the marketing and what we do.

We are the Internet's No. 1 music store. We were the first, and we've been at it for four years as of this summer. We really started marketing last summer in the fourth quarter. We were still running through a private placement, and then we went public in the first quarter of the year. We just filed for a secondary yesterday, so this is a quiet period for me.

I believe that all great marketing starts with a product, and I believe in marketing, you build brands from the inside out. What attracted me, when I came from Time Warner to CDnow, is that I believed that this was a better way to buy music for busy consumers 25 to 49, who, in the early days are very connected with music and as they get older and busier in their lifestyles, (the dominant household formation today is a two-income lifestyle), they get further apart from the demands of those lifestyles. We believe the computer can reconnect people and bring them back together. So what's important about it is record selection, the content and the ease and convenience of buying, and all those key pieces that go into building a better music store. That has been the vision of our company since the beginning. That's what we are focused on, and that's what we do.

Record selection, superior information, innovative services, using the technology, this is what I call a digital brand, fusing content and technology to serve consumers better. As a marketer, and I've been in the packaged-goods-marketing end, too: You're struggling to get it to the point of differentiation. This product is highly differentiated, but it's a new channel of distribution, so the marketing challenge is totally different. This is an example [slide] of our recent home page. We are a merchandising company, so it's not a publishing company. We are a retailer, a merchandising company. This is what we consider to be a store window [home page]. These are features that rotate [graphic art work on home page]. These are new releases that rotate. This space rotates frequently so that we are always putting something fresh in front of the consumers. This is content and navigational, and it stays the same. These topics here change every two weeks, but the key topics stay the same. A search engine is our core piece of what we offer consumers so you can always come in and type in the artist or label or title and then find it within 200,000 products. The database brings it to you. So there are different pieces of a store here that all need to be managed to serve the customer.

This is what we call the discography page. I just happened to pick Miles Davis as a case study. We have everything that's ever been done for Miles Davis and almost any artist. We did a comparison with the Bob Marley titles, to Tower in Philadelphia, where we're located, and they had 25 titles and we had 89. What you're seeing is the possibility to have an enormous breadth of selection but then you need to have the info to go with it so it's choice convenient. Basically, you have reviews, tracks, sound samples. So we put more knowledge and information at your fingertips than you ever could have had before at retail. That kind of gives you a sense and so you say, oh this looks like a better music store.

How do you market this? That is what this forum is all about. We developed a four-channel growth strategy, and we work each of these strategies almost like managing a portfolio. I'll take you through them.

There's online and offline advertising. We use advertising to reach out to the consumer, because remember, the Internet is our channel of distribution, and not everyone is on the Internet. Not everyone knows what is on the Internet, and they also have other habits that they already are entrenched in. And where's the money? There is CDnow, Music Boulevard, and a few other people. So what's the business on the Internet? Jupiter reported $50 million over the last year, with a forecast of $1.6 billion, but there's $12 billion at retail so you need to reach out. We need to address the retail customer and tell them that there is a better music store at their fingertips. What we're trying to do is use advertising to create awareness and create the brand persona, and if there is a persona that you can do and to reach out. We are positioned clearly not against Music Boulevard We are positioned in retail as a better way to buy music. Advertising is crucial.

Strategic Alliances. Until last summer, the whole E-commerce thing was buying banners and links and things like that. The enormous change in E-commerce in the last nine months has been these gigantic strategic alliances. We did the first one in the music phase with Yahoo!. We put that one together last September and launched it in October. We are the exclusive music retailer on Yahoo! and all the music spaces. We believe in search engines. We thought through this, and how consumers use the Internet. After all, Internet users are really what we are getting. The data tell you that of total sessions, about 70% of Web voyages and user experiences are initiated through search engines. So we did Yahoo!, then we did Web Crawler, and then, this spring, Lycos. We created exclusive dominance in search engines, so our pill (CDnow logo) is all over those key search engines to find and buy music and do promotions and do banners and so forth. The alliances are very important.

Another piece that we looked at strategically is you really have to think of the expense, that it has to work for you. You need to understand what you're doing and how it fits into your model and where it will take you. It's not just negotiating an E-commerce deal. The next thing we said is community is important to us. The communities are Geocities and Tripod. We did notice one or two, and we put a lock on the communities. These are where people create their own pages and share interests and so forth.

What we had already started was this strategy called our Cosmic Credit Program, which is a grassroots strategy. That was directed toward Webmasters who have fan sites. There are about 85,000 music sites on the Web and all these amateurs and wannabe Web gurus who have these Web sites for fans. We put a program in place where the Webmaster can come right to our site in minutes, link up, and take the links. So if you are a Pearl Jam fan site, you can come get the links, put it on, and there's our link. And you click on it, and you get to the Pearl Jam discography page, like the Miles Davis page. You don't go to our home page, you go to the Pearl Jam page, and you can buy and see all the selections of Pearl Jam. So what happens when someone does that? The Webmaster gets store credit. We just repositioned the store credit so that if he doesn't want that, he can get money. This is grassroots. A lot of the marketing on the Web that no one is paying any attention to is all about grassroots.

On an ongoing basis, we have personalized E-mail that goes out twice a month. People sign up for it, and it uses collaborative building technologies. So, if you bought Pearl Jam and Pearl Jam had a new release, you're going to find out about it, and you can buy it before it gets in the store. All releases are on Tuesdays, so you can buy it in advance and get it mailed it to you so you'll have it already the same Tuesday it gets into the stores.

There isn't one of these that if we didn't do it..... We wouldn't be the Internet's leader if we didn't do one of them. We need to do them all well. One of the things that I observed is that there are very few people trained and experienced in all of these. What I'm trying to do at CDnow just as a by-the-by is get people who understand all of these strategies so that I can create marketing people who can deal in E-commerce as it's unfolding, rather than a small segment of it. If we don't have all of these things working, I don't think you can be No. 1. So that's the sense of what we're doing.

Is it working? The customer growth seems to be going up. We acquired 100,000 customers in the fourth quarter which we only had 200,000 the first three years of marketing. We acquired 100,000 in the three months of marketing. For three years we did no marketing and had 200,000 customers. In three months we did marketing and got 100,000 new customers, a 50% increase. We acquired 135,000 new customers the first quarter of this year.

Marketing is important. It's important for building a brand, building a customer base. It's much more diverse, much more complex than people think. It's not just some banners and a couple of E-commerce alliances and a little E-mail stuff. It's a much more complex thing.

We said that wherever music is, that's where we want to be. Because what marketing is all about is a probability theory. It's all about the highest probability and acquiring a customer and making a sale. So where's music? It's in the Grammys. We started to plan this four months in advance to put together an integrated marketing program. We bought a sponsorship from CBS in the Grammys. We bought three spots. We then put all our partners together and did a Grammy promotion. We bought some radio. We did some print, and we did a big follow-up from the major promotion, and we had a tremendous spike in our business as a result of the Grammy effort. The idea is to get a brand persona -- but also to start driving people in with commercials.

Our message is pricing, selection, and a lot of promotional. What we're doing is marketing conversions to get people to go from one appliance, television, to the computer. It's not easy, but it's doable.

JASON CHERVOKAS, MODERATOR: Thanks, Rod. Very interesting. Two things, in particular, to keep in mind, that are interesting points of discussion. One, this gorilla and grassroots marketing element. The Internet is an odd and different space in that it's a place where there are millions of publishers and creators of destination sites. Taking advantage of something peculiar about the medium is very smart and very difficult.

The spike in traffic in offline advertising sort of raises a spate of issues about online marketing and the relative costs of going offline. Let's turn to Lou and ask him. It's one thing to market a music store on the Internet because it's sort of an analog that people can understand. You can give people a simile and say this is what it is, go to it. How do you market a service that know one has ever seen before?

LOU WEISS (AIRMEDIA): At AirMedia, we have a product, network, and service called AirMedia Live. What that is -- you may have seen it -- is a 4-inch-high pyramid that plugs into the back of your PC. And we're delivering all over the country wireless Internet-based news, weather and stock market information. We went out and made content partnerships with CNN and the Weather Channel and CBS Sportsline, and companies like that. If you are an occasional connect user of the Internet, and you're dialing in from time-to-time, but that's what you're always dialing in for, you can always have that stuff waiting at your fingertips without having to bother tying up the phone line or taking the time and effort to go looking around for what you want. It's the perfect setup for what I think is a very important point. Rod said that good marketing starts with a product and, at least for us, good marketing has to end with a product. Because what happened is for us, frankly speaking, good marketing started with a product and ended with a bad business.

We built this incredible product. We have won awards totally inappropriate for what we do for a living because people just felt the need to give us awards because our product was so cool. I have a drawer filled with press clipping about how we're the next coming of the Messiah and all sorts of great stuff. And at the end of the day, because we started with the product instead of starting with a customer, a problem, and a check, we wound up with a great product that everybody thought was really neat and not enough people took money out of their pockets to have. A hard-won and expensive lesson, but important to think about that the greatest products in the world are not necessarily the answer.

If you solve a problem for a customer -- the reason CDnow is so successful is not only because they have a great product but because it fits in with a large number of people who have a problem and a check. I want the music, but I'm not going to get up off my tush and walk over to the record store to buy it. I don't feign to understand your business, but at least for us, we have found that we have had a great deal more success in the cases where we started with the customers, the problems, and the money to solve those problems and ended up with the definition of the product that meets those needs. That's the first overall marketing point.

The second one that's interesting relates to the direct-marketing aspect that Rod hinted at. The Internet is the most unbelievable direct-marketing medium in the world because you get to know something about the people. The point Rod made about customers showing up from the ultimate Pearl Jam site and the fact that they come from that site, you know something very important about them. They like Pearl Jam, and instead of taking them to the home page, you take them right to the discography. It's the ability to know something in particular about your audience. That very much allows you to target your message to them on the Internet in a way that you can't anywhere else. This isn't marketing textbook b.s. This is very real stuff. We launched a direct-marketing campaign for our product and it was this real neat product like I said, news and sports and weather, real-time push. This was two years ago when push was a very hot thing. All delivered right to your PC. It's instantaneous. We ran these great colorful, witty ads on CNN and the Weather Channel and very-high-traffic sites that said: News, sports, and weather delivered right to your PC wirelessly. Nobody showed up, and the people that did show up did not wind up taking the product. The answer is that we didn't know very much about them. When they showed up by clicking on that -- what do I know about them? I know that they might want news, sports, and weather.

If they are coming to us from the CNN site, I already know that. It doesn't give me the chance to learn anything additional about them that might help us learn how to market to them. Then we started running ads that, gee, our product is really great for people who dial into the Internet. But it's useless for people who sit with LAN Internet access and corporate Internet access and high-speed Internet access. We're saving you the trouble of dialing in and the inconvenience of tying up the phone lines. So we ran these ads that said it's not a busy signal, it's your modem laughing at you. This was during the time when AOL had gone to flat-rate pricing, and no one could get through. It didn't talk one cent about what our product is or what problem it solved, but we knew that every single person that clicked on it was a dial-up user who was a little bit frustrated with the experience. It's the ability to know that stuff that allows us to so target the messages.....It didn't say AirMedia has great news, sports, and weather delivered wirelessly. It said, man, dialing in, what a pain in the butt. You're tying up phone lines, you can't get through. We've got this great solution to fix that problem for your CNN, for your Weather Channel, because, again, we knew that's where they came from.

Once we did that, we started moving thousands of the things. I'm talking no marketing budget other than the deals we made with the content providers to run our ads, which often were bounty-based, not impression based. So we only cut them a check if we actually sold something. With no budget and no massive artistic design, just a little bit of thought put into who's the customer, what's the problem, and do they have a check, and how can we get them to show up. We wound up with a much more effective campaign.

JASON CHERVOKAS, MODERATOR: That's really interesting, and that does lead perfectly into Frank. Is it different trying to market to consumers in this environment, or is it just like putting up pictures of thousand-year-old Georgians and selling them yogurt?

FRANK PALANTONI (DANNON): As much as my background has been in packaged goods, both domestically and internationally in marketing and general management, lately I've got involved in a startup venture on an entrepreneurial basis to advise the building of a business plan. A lot of those issues that you're pointing out about what's the same and what's different fall into three different areas. Just before the panel we were talking about what is marketing. It's probably a good place to start.

Probably what marketing is and what it's about is building a business model. I was approached by a group that wanted some advice on developing their business plans, and they had a great financial-services-type Internet idea. The first question I asked was how does this thing work, and there wasn't a clearly defined business model. By that I mean: Where do your prospects come from and what is the cost of converting those prospects, and how do you keep their loyalty? To quantify all that. I think that's really the first channel in marketing, and the question Jason posed: How is it the same or different? I think it becomes very similar in today's environment, whether it's a packaged good, food product, or household product, or the Internet. You're then faced with the prospect of that conversion and maintaining loyalty.

The question is not so much can those things be made relevant on the Internet but what are the exact principles that have to be taken out and really how do you put them down on a business plan and identify them, so you can get to the venture capitalists and prove it to them. But you really need to maintain those to operate the business in the out years.

JASON CHERVOKAS, MODERATOR: Jay is in the business of helping people acquire those relationships and maintain them. How can you do that?

JAY FRIESEL (24/7 MEDIA): Well, it's very simple. You have a seller and a buyer. You put them together, and all of a sudden you've got a deal. That's really all it is. We're somewhere between the end user, people in this audience, and people that are out there on the Internet and everybody else on this panel. We act as the intermediary. We are a three-month-old company. It was formed by a bunch of people that came from the cable business and traditional businesses -- cable, radio, TV -- who had done a lot of marketing to a lot of traditional media with a lot of traditional brands. Reaching the consumer in a very broad way, we realized very quickly that the Internet provided a channel that none of these other media did.

As Rod, Frank, and Louis said, if this isn't the best direct-marketing vehicle that's out there today, I don't know what is. We try to find relationships that work for the Web sites that we represent. We basically represent the top to the smallest Web sites, somewhere in the vicinity of 3,700 sites. A lot of them are key brand names, like AT&T and Netscape. We work with groups of national advertisers, directly with the advertisers and the agencies, and we try to put people together. We try to find solutions.

....Advertising on the Internet is certainly different than advertising in traditional media. We try to find a way for the advertiser to use the Internet medium so that it helps deliver what their ultimate marketing challenge is. Whether it's to sell more products, to sell their services, whether it's to draw people to their Web sites, or whatever it might be. So through the use of traditional marketing techniques interpreted across the Internet, we find ways to deliver that to the end user who is the consumer.

You may see today -- probably more than you have ever seen it, up and down Madison Avenue and Fifth Avenue -- bus signs that you've probably never seen before....You think, oh my goodness, that outdoor advertising really works on those bus stop shelters.... It's the same way that we look at the Internet, and it's a big challenge because using traditional methods of marketing don't always work on the Internet.

The Internet is the direct marketer's dream. It is a direct-marketing vehicle. It is a way to deliver the retailer without having to go to the mall to get it, whether you're selling CDs or selling any other product like that. This is a great way to do that. That's a tremendous challenge because in the Internet you're impacted by billions and billions of impressions all the time.

In our daily life, every single day we are impacted by impression, an impression that is delivered to you by some medium out there. We look for the ways the content in our sites deliver, and work with them in a way that we can marry advertisers to it, so that the advertiser can add to their marketing concept, their media plan, their development plan, so they can obtain a successful solution. That usually is selling more product.

Dennis Berman is a staff reporter at Business Week Online.