Time Warner Inc. is expected to announce today that it will pay about $1 billion to form a joint-venture record company with London-based EMI Group PLC, a source close to the company said.

Although earlier reports said two companies intended to merge, the deal will be structured as an alliance, with Time Warner and EMI pooling their music resources while remaining as separate entities. The two record labels, with a prestigious back catalogue that ranges from the Beatles to the Beastie Boys, will market music jointly and combine efforts to sell products over the Internet.

"This makes more sense than an outright acquisition," a source close to the companies said. "It's a great way for the companies to exploit each other's assets without obscene amounts of money changing hands."

Under terms to be announced, New York-based Time Warner will give EMI shareholders a premium of about $1.65 for each of their shares, a sum that comes to slightly more than $1 billion. The premium is to reflect Time Warner's ascendancy in the proposed alliance--the company would appoint six of the 11 seats to the company's board, the source said. EMI would contribute all its assets, except for its stake in the record retailer HMV Media Group PLC. Time Warner would contribute its music division, Warner Music Group, which includes labels such as Elektra, Warner Bros. and Atlantic, and artists such as the Red Hot Chili Peppers, Kid Rock and Jewel.

It's unclear how the deal would affect America Online Inc.'s acquisition of Time Warner. If both deals are ultimately approved, it will create a juggernaut that could pioneer--and perhaps even establish standards for--the sale of music over the Internet. Record labels have been grappling with ways to deliver songs via the Internet without encouraging online pirating. If AOL effectively has control over the catalogues of Time Warner and EMI, it will be the first time that a company will be able to marry a library of songs with Internet know-how and turn those tunes into cash.

The companies expect to consolidate their music manufacturing and distribution units in the hopes of achieving $400 million in savings over the next three years. The companies also will try to complement each other's geographic strengths: Time Warner is considered a powerhouse in the United States, but has failed to make a similar impression overseas; EMI is a potent international force, but has yet to make big inroads in the U.S. market.

The proposed alliance is likely to face scrutiny from antitrust regulators. The Federal Trade Commission, the agency that likely would review the proposed venture, recently has said that it is getting increasingly skeptical about mega-mergers, particular in fields with a dwindling number of competitors. If the alliance is approved, the number of major labels will fall to four from five.

The agency, meanwhile, is investigating allegations that labels are unfairly punishing retailers that try to sell compact discs below a certain price. Negotiations between the labels and the FTC on that matter reportedly are ongoing.

Time Warner and EMI are likely to argue that their alliance is necessary to challenge Universal Group, a division of Seagram Co. which bought Polygram for $10.4 billion in 1998. Universal now commands 26.39 percent of the U.S. music market, according to Sound Scan, which tracks record sales. A combined Time Warner-EMI Group would have 26.48 percent of the U.S. market.

The proposed alliance is to be announced this morning in London, with Warner Music Group Chairman Roger Ames and EMI chief executive Ken Berry disclosing the terms of the deal.