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K-tel International Set to Spread Disco Fever Over the Internet

Can a company famous for music compilation titles like Flashback Fever and Disco Dynamite sell to consumers on a medium where another name associated with the 1970s — Spam — has been so vilified?

Executives at K-tel International Inc. (Nasdaq: KTEL) think so. And they say back-end management will be what sets K-tel apart from other Internet CD merchants.

Having recovered from bankruptcy in the mid-'80s, K-tel, Minneapolis, is set for the May 1 launch of a Web site for music shoppers called K-tel Express at www.ktel.com.

According to Corey Fischer, K-tel's chief financial officer, the site will feature the company's well-known compilation titles along with 250,000 single-artist titles from an undisclosed distributor.

“We have an agreement with a prominent music distributor who will be handling all of our fulfillment, similar to what CDnow, N2K and Amazon.com are doing,” Fischer said.

A statement released by K-tel took aim at established Internet music marketers CDnow Inc. (www.cdnow.com) and N2K Inc. (www.n2k.com) by naming them and saying that K-tel Express will “rely heavily on newly developed direct-to-the-consumer marketing methods as opposed to the more traditional search-engine relationships being exploited by its competitors.”

CDnow and N2K did not return calls for comment.

K-tel's announcement apparently was enough to help it catch the wave of investor enthusiasm over Internet stocks. K-tel's stock shot up $6 1/4 to $12 7/8 on April 13. On April 20, the market closed with its stock at $41 5/8.

“They have done nothing except say they will sell on the Internet,” Roy Blumberg, chief investment strategist at Josephthal Lyon & Ross, told Reuters News Service. “It's just old-fashioned speculation.”

As for the state of the online music market, Fischer downplayed the idea of having to fight for a piece of the pie.

“K-tel is a known and trusted name, and we feel that we'll quickly gain market share,” he said.

Evan Neufeld, online advertising analyst for Jupiter Communications, New York, said Jupiter predicts that total online music revenue will skyrocket from $179 million in 1998 to $2.8 billion by 2002.

“There's more than enough room in this market for everybody to play nice,” Neufeld said.

Fischer also distanced K-tel from its competitors' marketing practices.

“There's very little money to be made on the front end because we're all working with the same margins,” Fischer said. “There's going to be a lot of fallout.”

Consequently, instead of trying to gain market share by striking multimillion-dollar sponsorship and partnership deals with highly trafficked Web properties, Fischer said, “The opportunities are going to be in the successful database management of customer names through the back-end sales.”

He declined to detail K-tel's marketing plans but said the company will capture customer data online and offer titles and products geared to individual tastes. “K-tel will rely heavily on worldwide television expenditures to drive traffic to the Web site,” he said. Last year, K-tel spent between $30 million and $35 million on television advertising.

K-tel's operations in the United States, United Kingdom, Germany, Belgium and Finland also give it a marketing advantage over its online competitors.

“Each of those countries has different licenses and rules for fulfilling orders to customers,” he said. “[Direct-to-consumer selling in Europe] is not something you just decide you're going to do overnight.”

K-tel also plans to bundle songs from its library of more than 3,500 top-100 hits into various offers.

“We have the ability to offer consumers incentives that the other companies will not have,” said Fischer, who added that continuity programs also are likely.

For the first six months of fiscal 1998 ending December, K-tel reported $48 million in revenue.

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