CDnow, Columbia House join forces

By Rob Guth, Computer World |  Software

Sony Corp. and Time Warner Inc. said today they will merge their Columbia House music club with online music retailer CDnow Inc., creating a major Internet-based seller of music and entertainment content, the companies announced today.

Under the deal, the partners will create a new company that combines Columbia House's music and video direct sales businesses with CDnow's online operations. Equally owned by Sony and Time Warner, Columbia House is a music club that sells exclusively to its 16 million active members. The business last year earned revenue of about $1.4 billion and expects $100 million in online sales this year.

Sony and Time Warner will each take 37% of the new company. CDnow's existing shareholders will hold the remaining 26%. The partners expect to complete the merger, which is subject to shareholder approval, by year's end. A name for the new company hasn't been decided, a Sony spokesman in Tokyo said.

The combined company will boast an online customer base of 4 million and offer so-called "packaged music," such as CDs that can be purchased online as well as digital music downloads. Both Sony and Time Warner said they will provide the new company with certain "financing guarantees" and offer it advertising as well as access to various entertainment holdings and customer databases, the companies said.

"Sony and Time Warner are going to provide the technology and the content to make the new company a powerhouse in electronic music distribution," said Daniel Lintz, a spokesman at Sony's Tokyo headquarters.

The deal marks a sort of coming out for Sony in the world of Internet commerce. The Japanese vendor is backing several Internet initiatives in Japan, including an online stock trader, but today's deal marks its highest profile push into Internet commerce to date. The deal also gives a big boost to CDnow, which is under attack by Internet retailers both big and small.

Founded in 1994 by twin brothers, CDnow quickly became one of the most visited sites on the Web, attracting customers with a catalog that now exceeds 500,000 music titles. It hoped for rapid growth through a recently completed merger with rival N2K Inc. -- last year the two companies had combined revenues of $99 million -- but Amazon.com Inc. has since surpassed CDnow as the largest Web music retailer. Takeover rumors have surrounded CDnow since early this year.

Whether the new company can combat Amazon and others remains to be seen, but the deal will still likely serve as a symbol: the established powers of the music industry are waking up to the challenge of selling music -- not via CDs -- but as audio files that can be downloaded over the Internet.

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