Like, which has revolutionized the world of book selling, CD Now, based in Fort Washington, PA., has taken the online music retail scene by storm. Five years after twin brothers Jason and Matthew Olim launched the company in their basement in 1994, CD Now has grown into a business that expects to end 1999 with sales of $200 million. In March, CD Now completed its merger with N2K, another Internet-based music retailer. CD Now’s CEO Jason Olim spoke to Eric Johnson, director of the Wharton Forum on Electronic Commerce, about the merger and his company’s business model and strategy. Edited excerpts from that discussion:

Johnson: Could you talk about the process of your merger with N2K and some of the challenges involved?

Olim: N2K, interestingly enough, was founded 20 minutes from my home in the Philadelphia area. The company began planning its Internet strategy around the same time that we did. We came at it from very different sides. Our original strategy was to build a better music store and to use technology to allow people to discover music and learn about music. N2K’s approach was to entertain the customer–and to create another channel to sell products. Over the past four years, our business models merged and came together. While we have come into the world of editorial content, they have focused more and more of their energy on delivering a high-quality music store. So as our business models began to merge, we realized that we were probably better off doing it together than apart. One of the key drivers in our business is the concept of scale and the leverage that comes from scale. We felt that by bringing the organizations together, we could achieve scale and critical mass more quickly and effectively. So what issues do we face? We face different consumer propositions: We have strength in some areas, and they are strong in others. That leads to a number of challenges–technical challenges, programming challenges, communication challenges, and so on. The other big challenge is culture and business strategy. When you bring two organizations together that have been competitors for a number of years, that is quite challenging. I have had to tell both organizations that the wild animal that you may see in the forest is probably just as afraid of you as you are of it. But we are very similar in terms of our people and what we want to accomplish. So our challenge is to make people understand that we have similar cultures, and we can and do come together under our mission.

Johnson: How often has CD Now changed business models, and how do you view these changes?

Olim: Our business model used to change every week, and now it is every 90 days. The business has changed extraordinarily rapidly. New things have come into the model and old things have gone out. We have probably become more adept at change management than anything else–whether it is the problems we choose to attack, the solutions we apply or the people we put into the breach. Our business has gone from creating a better music store to creating a connection between consumers and music as a category. When we first started, one of our ideas was to first launch a music store and then other kinds of stores to sell other products online. But we soon realized that selling music online was a big enough task if we wanted to do it really well and better than anybody else. We started a music store and then realized that it’s not just music we are giving our customers. We also educate them–there is value in such guidance and personalization. So we don’t just sell music. We connect consumers to music as a category. That involves building multiple business models. In addition to a retail model, we have a business-to-business model that includes advertisement sales to other businesses as well as promotions, premiums and incentives. We also provide editorial content, for which we sell advertising. So our business is becoming more music-oriented, as we go deeper beyond just selling products.

Johnson: You have spoken in the past about going from a transaction model into a relationship model. How did that change occur?

Olim: We knew from the beginning that this was a direct marketing business and that direct marketing is about relationships. We realized very quickly that we did have a relationship with the customer. We saw the same people sending checks week after week and month after month and buying more and more music. We did a test. We acquired a database and asked, how many of our customers have bought from us more than once in the last 12 months, and we discovered that we did have a relationship with our customers. We quickly realized that we were in a relationship business, like direct marketing, and that we had to manage the relationship between consumers and products and also between consumers and music as a whole.

Johnson: One of the differences between tradional direct mail and this business is that you can personalize recommendations based on a consumer’s past purchases. You were one of the major innovators in this regard. Can you tell us how you measure effectiveness?

Olim: We were probably the first company to use artificial intelligence to help sell products. We worked with a group that had artificial intelligence technology and incorporated it into a weekly email that we would send our customers called CD-Now Update. We compared the music that individual people bought with other customers who had bought the same music. This allowed us to recommend music that those customers might like, because people with similar tastes liked it too. We also realized that if you liked an album by the Beatles, and a new anthology was coming out, we sent you an e-mail about it. We viewed it as our mission to inform and educate the customer. I don’t know if that was a naïve thought, but to view it as just marketing would be cynical. By giving customers information that they want, we can market to them very effectively. In fact, they are able to market to themselves.

Johnson: has entered the CD business with a lot of publicity. What are doing to compete and how well do you think Amazon is competing with you?

Olim: Amazon has a different model and consumer proposition than ours. The quarter in which they launched their CD business, we grew 26%. So even if they were able to acquire some of our customers, it’s not such a terrible thing. Amazon’s business model is a new model. The company started as a book seller, very much like us, but then they decided to adopt a horizontal model. They are going from one product to another to another. Basically, they are building a department store. That’s a fine model–but it’s very different from ours. We believe that our model offers a consumer proposition that is very valuable and which can be very profitable. Our model is one of owning a category vertically. In the physical world, one goes to a mall or a department store because one wants five different products and one doesn’t have the time to go driving around. If you are only looking for one product, you go to a specialty store. Online, it is easy to go to a specialty store. That is as easy to type as any other URL. We think that structurally it is only possible for a single leader to be a leader in a category. Our ability to connect customers to music is unsurpassed, and our model of going deep into the music category is truly a high-value one for the consumer.