CDnow, Columbia House join forces

Computer World –

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.

Over the past year, leading record labels including Time Warner's Warner Music and Sony's Sony Music Entertainment have stood by as Web sites spread pirated versions of their artist's songs. The spread was fueled by MP3 (Moving Picture Experts Group, Audio Layer 3), a compression format that makes it easy to download songs directly onto a PC but offers no copy protection.

The MP3 boom threatens not only Sony's CD sales but also its position as the leading maker of music playback machines like the Walkman. Diamond Multimedia Inc., with a device called the Rio, is the top maker of portable devices for playing back downloaded MP3 files.

Though Sony has publicly opposed MP3, today's deal fuses it with a company aggrressively pushing into digital music sales of all types.

CDnow, Fort Washington, Pa., this month began testing the music download waters through a deal that offers promotional tracks from Time Warner's Atlantic Records. The songs are protected by a recently launched format from Microsoft Corp. called Windows Media. CDnow is expected eventually to offer its full song catalog for download but hasn't committed to a time frame nor a technology format.

For its part, Sony is readying both software for securely sending music over the Web as well as portable players that it hopes will challenge Diamond's Rio. One such device under development is called the Memory Stick Walkman and uses a flash memory card to hold downloaded music. In recent interviews Sony officials also left open the possibility that they will launch a portable device for playing back MP3 files.

One of Columbia House's Web sites will be used in a trial later this year in San Diego that will test the feasibility of Internet music sales, Lintz said. After the new company is created, Sony expects to back any technology or services that its customers demand, he said.

Meanwhile, CDNow today said it expects it second-quarter loss per share, excluding one-time charges, to be lower than First Call Corp.'s 83-cent estimate. Revenue will be between $34.5 million to $35 million for the second quarter ending June 30, CDNow said. It added approximately 350,000 new customers in this quarter, totaling 2.3 million customers to date, the company said.

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