CD WOW!: Phil Robinson
Loathed by retailers, loved by consumers, the founder talks legal battles, downloads and point of difference
Phil Robinson lives next door to Ozzy Osbourne. He's just got back from meeting the Stones backstage in Miami. His second Porsche is on order. He's helping book gigs for a band formed by his employees. He's just bought his daughter a bass guitar online – she can't play.
Robinson might be every inch the frustrated rock ‘n' roll star, but he's certainly stamping his mark on the music industry with online retailer CD WOW!. In six years he's built a £100m business that's had such an impact on the way we buy CDs that HMV and EMI tried to get it shut down.
Robinson and co-founder Henrik Wesslen are British. CD WOW!'s first and most developed market is UK and Ireland. It, however, is a Hong Kong business – and that, is crucial. Much to the irritation of the likes of HMV, CD WOW!'s non-EU status enables it to buy and sell products without paying or charging VAT. As the Sex Pistols proved more than 25 years ago and the download phenomenon is now underlining, what outrages fat cat music execs rarely bothers the consumer. Consequently, when CD WOW! broke onto the scene selling CDs at £8.99, Joe Public was only too happy to make a saving.
Point of difference pricing
It's a sign of CD WOW!'s impact that £8.99 no longer has the wow factor it had six years ago. If you'd wandered into any record shop in 2000 you'd have been happy to pay £14 for a chart CD. Pricing was CD WOW!'s number one kill – not only were its CDs at least 30% cheaper than on the high street, they were all the same price.
“In the early days we lost money on labels to do it,” admits Robinson. “But we knew it would send out a clear message, as the consumer didn't understand why a Warner product cost more than an EMI product; to them it was a Madonna or a Robbie.” And when it came to that all-important price, Robinson wanted the point of difference to be as aggressive as possible.
“Why not make it £9.99 and take an extra £1 profit? We'd rather come out with such a difficult price for someone to copy that they would look at it and think ‘we don't want to get involved in this'.”
In effect, that's what happened. While the high street ran permanent sales, the online competition simply balked. “CDNOW went back to the US, BOL went back to Germany, BorrowOrRob went bust, Jungle was bought by Argos and disappeared, and all of a sudden we were the last man standing,” recalls Robinson.
‘Pay and go principle'
Price wasn't the only point of difference for CD WOW!. At a time when the internet was “going all Pete Tong”, Robinson was determined to learn from the dot com behemoths collapsing around him. He installed a basic set of principles the company has never veered from.
“The first was that you've got to include delivery in the price otherwise it's like a hidden extra. The second was that if you ordered 10 items you got 10 items delivered individually, as there's nothing more irksome than buying on the internet for convenience and then having to go to the sorting office on a Saturday morning to pick up,” explains Robinson.
Thirdly, CD WOW! offered what it called a ‘Pay and go' service, where you could complete a transaction without registering. It's unusual now; then it was a rarity. “We don't want to know your shoe size or sexual orientation; we just want your £8.75,” says Robinson. “We'd like you to become a member, but you don't have to.”
And fourthly, Robinson bucked the trend for content- rich sites. “Editorial is enormously expensive, and for the majority of people it's of no interest whatsoever. We felt a chart is self-editing.”
Arbitrage business model
While CD WOW! had great front-end differentiators for the consumer, it was the back-end that made it tick. The idea for the company came when Robinson – a veteran of music reselling, having sold cassettes into petrol stations and then started a publisher of budget classic CDs that achieved a £50m turnover and a double-subscribed LSE listing within three years – was asked to invest in Wesslen's Hong Kong-based international wholesale CD company.
“The number of customers was diminishing and the margins were shrinking, but the relationships Henrik had built with suppliers over 15 years were extremely valuable,” says Robinson. “Over a cigar and a cognac we came up with the idea of putting a retail end on it.”
Initially this meant using Wesslen's business to supply web orders from a trial site. “If he didn't have it, I'd nip over to Woolworths and buy it,” recalls Robinson. However, it soon became obvious there was strong consumer interest. “We wanted to be sure we had a pull business not a push business, and by May 2000 we knew we did.”
The real point of take-off was striking a deal with credit company Egg. It not only gave the company access to more customers but set the its future marketing strategy. “I offered them 25p per unit commission but their guy said, ‘you'll never shift enough to make a difference to Prudential's numbers',” recalls Robinson. Instead Egg opted to take the 25p as a reduction incentive for its customers. “We realised that as soon as you've got a credit card you've got a currency to do business with us. We did RBS, Mastercard and all the Lloyds Group – they're massively important to us.”
At this point Robinson and Wesslen got serious, each investing “several million” to switch warehouses, build infantry and buy stock. It has a buying team, led by Wesslen, scouring international market for best prices. “While Madonna might be hot in one country she won't be in another, and we buy and sell across markets,” explains Robinson. “It's a classic arbitrage business.”
In its first 12 months of trading the company lost £70,000 from £2-300,000 turnover, but as the agreements were set up and word spread, visitors increased considerably. By 2002 turnover was up to £16m. “That's when when we knew we had a £100m business,” says Robinson.
Getting to £100m took just three years – but it wasn't a gold rush. The dot com cash cow had long gone but Robinson had seen all he needed to about the pressures of pleasing investors. “We were completely self-funding. We saw others that had shareholder pressure and were being pushed into ridiculous advertising. Not having that meant we could stick to the business model.”
Reaching a mass market
Indeed, Robinson boasts that CD WOW! has never paid for advertising space. Instead it's built a mountain of affi liate schemes and partnerships. In February it offered 75,000 vouchers to Daily Mirror readers gaining front-page exposure. “We only pay for the people that redeem the voucher and it's always less than the value of an item. They have to be transactional and they must opt-in,” says Robinson.
The company's reach is staggering. Through bill inserts with credit card and phone companies and partnerships with the likes of Nectar, in November last year alone it sent a staggering 80,000,000 communications.
Fighting legal action
Robinson hasn't had things all his own way, though. In 2004 he was forced to reach an out-of-court agreement with the British Phonographic Institute (BPI) against claims of selling non-EU licensed products within the UK. Robinson is unable to reveal details of the settlement but is less coy about the instigators of the action – and his belief that CD WOW! had done nothing wrong.
“The international postal laws are absolutely clear. When an item goes into the post with the recipient's name on it, it belongs to them. It changes hands at that point – in Hong Kong. You can make as many imports as you like, providing it's not for commercial use and as long as each individual shipment is less than 22euros / £18.
“We got into a ridiculous legal row. They [BPI] were infl uenced by UK record companies. They were infl uenced by HMV. HMV pulled EMI's chain. We spent over a £1m in legal fees, as we were absolutely seriously convinced that our business was 100% robust.”
The one widely published result of the agreement was that CD WOW! agreed to put £1 on every product, a detail that brings thundering laughter from Robinson. He explains: “That was a marketing ruse, I'm afraid. It just let us say ‘you've only got two weeks now before the prices change'. We were able to blame the record companies as everyone hates them anyway. We had an unbelievable month, changed the price for a week and then put it back down again. We even won a PR award for how you can put your prices up with people thinking it's OK!”
Even if it emerged unscathed from its legal battle, CD WOW! has faced real competition from the supermarkets, notably Tesco, offering budget CDs imported from VAT-exempt Jersey. “Our point of difference has eroded over time and others have emulated the model we created,” acknowledges Robinson. At the point of going to print it's possible to buy the No.1 album in the charts at Tesco for £8.95 and from CD WOW! for just 20p less.
Robinson isn't duly concerned. “I think that's coming to an end. The states of Jersey have said, ‘Hang on, they're not real businesses here. They're not doing anything for the island,' and I believe there's been pressure from UK Customs and Excise, saying, ‘If you're a UK public company you can't divert a part of your turnover from outside'.
“We think it'll change. The point of difference will open again and the supermarkets will find another product to be very aggressive on and leave us in a very strong position.” Robinson adds speculatively that CD WOW! could eventually supply some of its competitors should the Channel Islands window close.
Another logical competitor is Play.com. Born at around the same time but focusing on DVDs, it's since branched out into other products – as has CD WOW! – to include CDs. Robinson acknowledges Play as a “great business that is very similar to us”, but he believes each has maintained its individual identity and prefers to focus on Amazon and his old adversary HMV as target competitors.
Indeed, it announced in March it was to widen its range by 350,000 titles in an attempt to rival HMV and Amazon's back catalogue offerings. “We've got to where we are by basically selling 1,000 CDs and DVDs – which is amazing. When we looked at our searches, we weren't able to supply deep catalogue, so we've done a series of agreements and are applying aggressive pricing on this too.”
Can they realistically close the gap on Amazon or HMV, though? “We're light years away, frankly,” admits Robinson. However, as he's already proved, he's not one to shirk a fight and revels in stirring up the market with a bit of spin. “I like picking on HMV,” he says. “When I looked at their numbers for last year they'd struggled, but their website was included. I know that's going strong so it's definitely disguising how poorly they're doing in the high street.”
Robinson sniffs at the idea of ‘organic' growth. He's determined to remain aggressive and hit new markets. Initially, that's about launching more country-specific sites. “Generally, if Amazon aren't there, it has high VAT and good credit card penetration, it's an attractive market,” says Robinson. “But we also consider the local product. We wouldn't necessarily do South Africa, for example, as the Sowetan product is very cheap.”
Credit card penetration data gathered from the company's partners is also a crucial source for strategic decisions, as is its own analysis. “We look at our traffic closely,” says Robinson. “Denmark got to be 3% of the main site so we went there, and now we have a Danish site with Danish local music. It doesn't cost us a lot to get in there and have a look.”
There's a clear strategy for entering a market. “We find a quick in to get an interesting position in the market,” he explains. “We'll do a deal with Mastercard, run a special and pick the low-hanging fruit. Then after that first year we'll see if it's worth working harder.”
Mobile and downloads
By Robinson's admission CD WOW! is a follower of technology not an innovator. However, it's making pace to be at the forefront of the latest media trends. It recently struck a deal with Reporo, the company providing the fi rst full web-enabled credit card transactions over mobile phones. Together they're offering adapters the chance to buy chart CDs at an unprecedented £2.99 – a loss entirely covered by Reporo.
For now, though, Robinson is more excited about downloads. So long heralded as the death knell of record companies and resellers, the market now wants to jump on the bandwagon – and Robinson wants in. He has big plans and says CD WOW! will launch a new download service before the end of the year that will be “the least expensive in the UK” and deliverable to mobile. “It's just a case of being a bit more canny,” is all he's prepared to say.
Robinson believes, regardless of the iPoddriven demand for downloads, that the “human propensity to collect and put things on shelves” will ensure the continued demand for CDs, however. He completely rebuffs the claim that illegal downloads are in any way a threat, citing the example of Arctic Monkeys, a band which recently built a following by sharing downloads before shifting 360,000 CDs in a week (the fastest selling debut album of all time).
“I've got a big thing about this and fucking record companies,” he says. “There's never been a time since 78s that you haven't been able to duplicate music. Whether it was on a reel-to-reel off the radio or making cassettes off vinyl it has always been part of the market. It is how people get to know about music.”
Taking the theory further, he says it is the record companies and traditional resellers' disregard for perceived value for the customer that has left it open to piracy – and the emergence of retailers such as CD WOW!. “They didn't do this, but people know Arctic Monkeys can make an album in their bedroom whereas something like Lord of the Rings costs millions and retails at almost the same price. The perception of value in one is unbelievable while the other is a complete rip-off.”
Critical analysis of the rest of the industry leads to the obvious question: how much does CD WOW! make per CD? Robinson is surprisingly open. “Postage is an enormous cost to us. We're the biggest sender of post in Hong Kong. At Christmas we have our own 747s coming over. It costs about £1.10 for basic pick, pack and postage, and generally per CD we'll make between 50p and 70p.”
That's healthy profit, especially when you consider Robinson and Wesslen have 44% equity each, with the other 12% belonging to Robinson's brother Terry, the company's FD. Robinson expects turnover to grow to £130m this year, with profi ts likely to hold at £7m due to a deteriorating selling price and disproportionately immature markets outside of the UK and Ireland. However, he's looking into new ways of boosting that profi t further.
“We're looking at top-slicing,” he says. “Twenty per cent of our customers provide 80% of our business, so we are considering a gold club and a number of similar initiatives.” Sounds like it could be a hit.
Name: Phil Robinson
Company: CD WOW!
Proposition: Online retailer