Online music retailer CDNow said yesterday that it plans to merge with music-club mogul Columbia House, a deal that will give Columbia House's big-media owners -- Sony Corp. and Time Warner Inc. -- a new foothold in the small but fast-growing business of online music.
Columbia House will continue to operate as a membership-based music club, and CDNow will remain an online music retailer. But the two companies will link their Web sites to the online retail site of a new company, giving a wider selection of titles to customers.
"The deal will help Sony and Time to migrate their business online," said Derek Brown, vice president at securities firm Volpe Brown Whelan.
The agreement is the latest in a series by big media companies to secure a place in the online world. Just yesterday, Walt Disney Co. announced a deal to buy full control of Infoseek Corp. and create a new company to oversee all of Disney's Web sites.
CDNow said that the new company will be able to use Time Warner's and Sony's resources to lower costs and expand its customer base. Columbia House, which sells music and videos direct to buyers, has 16 million active "club members."
The merger will create an online music marketer with a customer base of 4 million people who now use CDNow's service or the Web service of Columbia House.
The companies did not disclose financial details of their agreement.
CDNow has been losing market share to Amazon.com, which began as on online bookstore but later branched into music. CDNow this year acquired N2K, a rival company, but that has not arrested the decline in market share.
"It's the best long-term position for CDNow," Brown said.
Robert J. Martin, Internet analyst at investment bank Friedman, Billings, Ramsey Group Inc., agreed it was a good alliance for the Web company.
"Anybody can sell a commodity product on the Net," he said. "But in music you need good, proprietary titles to get customers. Sony and Time Warner can give them that."
Online CD sales will grow from $1 billion in 1999 to $8 billion in 2003, according to industry forecasts. Columbia House had sales of $1.4 billion in 1998; CDNow had $98.5 million.
Sony and Time Warner will hold 37 percent stakes in the company, with the rest held by CDNow. The new company will have a 12-member board comprising four members each from Sony and Time Warner, two independent directors, CDNow chief executive Jason Olim and the yet-unnamed chief executive of the new entity.
Olim will be the CEO of the new company's online retail division and Columbia House CEO Richard Wolter will head the club operations. CDNow Chairman Jonathan Diamond will leave the company after a new management team is in place.
CAPTION: Sony CEO Nobuyuki Idei and Time Warner chief Gerald M. Levin yesterday.