Time Warner and Sony to Buy Net Retailer CDNow

Forging a new path into the digital future, entertainment behemoths Time Warner Inc. and Sony Corp. announced plans Tuesday to buy online music and video seller CDNow Inc. and combine it with their Columbia House record club venture.

The value of the deal was not disclosed, but analysts say it offers additional proof that the world’s biggest entertainment companies are serious about controlling electronic distribution of their products in the near future--a move that could eventually wreak havoc in the traditional retail sector.

The announcement comes just one week after British music giant EMI Group bought a chunk of online retailer Musicmaker.com and just months after Seagram Co.’s Universal Music Group and Bertelsmann Music Group joined forces to sell recordings directly to consumers at a Web site called GetMusic.com.

All five majors intend to ultimately use the Internet to digitally download recordings directly to fans.

“In the last three months, we’ve seen the world’s major entertainment companies all tie up online deals, but I believe this is probably the most significant,” said Michael Nathanson, an analyst for Sanford C. Bernstein & Co. “This isn’t just two companies getting together to create a start-up. These are two ongoing operations with complementary strengths. CDNow is a growing online retailer and Columbia House has an established infrastructure with a huge database of customers.”

Although Time Warner and Sony may be able to create a new online retail model by fusing Columbia House’s direct-marketing expertise with the Web’s No. 2 music retailer, the deal is raising eyebrows in the artist and merchant communities. Their profits could shrink as more music is sold at a discount.

In the past, artists have been paid a pittance for recordings sold through clubs such as Columbia House, where consumers often can purchase 10 compact discs for the price of one.

Record companies tell artists that the clubs are good promotional vehicles for music, but retailers complain that clubs cannibalize music store sales.

Sony and Time Warner said Columbia House will continue to operate separately as a club membership and that CDNow will continue as an online retailer that buys inventory from distributors or directly from music companies.

But some managers and retailers wondered whether CDNow, which already sells discounted compact discs, will get price breaks from Time Warner and Sony.

Sony and Time Warner also will offer the new company advertising on their various media outlets and content from their Web sites.

Terms of the deal weren’t disclosed, but Sony and Time Warner plan to take the merged company public and to each own 37% of the new firm when the deal is completed by year-end. Under the deal, CDNow shareholders would get one share of the new entity for each share they own, for a total of 26% of the equity.

CDNow, based in Jenkintown, Pa., started selling music on the Net in 1994 and expanded in March by purchasing rival N2K Inc. CDNow, which went public last year, lost its lead as an online pioneer to bigger and better-financed rivals such as Amazon.com Inc. CDNow had $98.5 million in sales last year.

CDNow shares lost $1.94 to close at $20.31 on Nasdaq. Time Warner fell 31 cents to $75.75 on the New York Stock Exchange.