Cutbacks at CDnow; Harman Reports Decreased Profits

Despite the best efforts of Federal Reserve Board Chairman Alan Greenspan to extend an unprecedented economic boom, the nation's economy is slowing. The slowdown is causing negative repercussions in many sectors—including the music retailing business and consumer electronics manufacturing.

Almost coincident with inventory and workforce cutbacks initiated by, the Internet's most prominent sales site, music retailer CDnow announced that it will eliminate 55 jobs in its advertising sales force, a 12% reduction. The belt-tightening is part of a general restructuring by the music site's parent company, Bertelsmann AG, the German media conglomerate whose e-commerce group includes (an Internet book, movie, and music sales site for Europe and Asia) and a minority share of bookseller, Inc. According to a Bertelsmann spokesman, the company's intention is that CDnow should concentrate on what it does best: "selling music, DVDs, and movies online, instead of selling advertising on its sites."

Bertelsmann acquired CDnow in September 2000 at a reported cost of $117 million. The restructuring of CDnow coincided with the appointment of attorney Joel Klein to the posts of strategic advisor to Bertelsmann CEO Thomas Middelhoff and US liaison officer to the parent company. Klein is former head of the US Justice Department's antitrust division, and was instrumental as a behind-the-scenes player in prosecuting the government's successful antitrust case against Microsoft Corporation. His expertise will be leveraged to "overcome regulatory hurdles" in Bertelsmann's efforts to expand in the American and global markets, according to the Wall Street Journal; these include the impending merger of Bertelsmann with UK music giant EMI (see related story). Klein will not have direct operating responsibility for any of the company's US operations, which include the Bertelsmann Music Group and its subsidiary labels RCA and Arista Records.

The health of the audio industry in general can often be extrapolated from financial statements from the industry's few large publicly traded companies. The industry may be a tad under the weather if results from Harman International Industries, Inc. are any indication: On Wednesday, January 31, the Washington, DC– and Northridge, California–based consumer electronics corporation reported that it expects to yield a profit of about 30 cents per share for its third fiscal quarter. Profits for the same period last year were over 90 cents per share, according to Reuters news service.

In September 2000, Harman was on the losing end of a $5.7 million patent infringement suit brought against it by Bose, Inc. The company also took on a $12 million restructuring charge upon the reorganization of its Harman Consumer International Group, according to its chief financial officer, Frank Meredith. The predicted per-share profit is less than half the 69 cents per share that analysts had expected. "Softness in consumer electronics sales" is Harman's official explanation for its disappointing performance.