Columbia House Swallows Up CDNow

The name that has become synonymous with direct mail music sales is now about to swallow up one of the Internet's retail music pioneers. CDNow Inc. (Nasdaq: CDNW) plans to merge with Columbia House, the music and video club owned by Sony Corp. of America (NYSE: SNE) and Time Warner Inc. (NYSE: TWX). Sony and Time Warner will each own 37 percent of the new company, with the rest owned by CDNow's shareholders.

With two of the largest entertainment companies in the world now holding the purse strings, CDNow is expected to become a major North American e-commerce and direct marketing company. The multi-faceted Sony and Time Warner empires each include recording companies -- Warner Music and Sony Music -- and broad-reaching marketing arrangements in the Internet world. "CDNow shareholders will benefit from the new company's ability to leverage the cross-promotional strengths and full resources of Sony and Time Warner to lower its customer acquisition costs and boost its customer base," the companies said.

Columbia House has 16 million members buying music and videos through its direct mail club, while CDNow has about 2.3 million customers at its online music store. The alliance also puts CDNow squarely in the race to put digitally downloadable music on their sites, with access to Sony and Warner Music titles. "With the commercial arrival of the digital downloading of music, [the merger] gives us an important platform for offering consumers the opportunity to order or download music instantly," Time Warner CEO Gerald Levin said.

Cross-promotion

Sony's and Time Warner's music Web sites will be linked to the new company's online retail Web sites, enabling music fans to sample content and buy music. Sony and Time Warner will also enable CDNow to buy ad time on their various media properties, such as Time Warner's Turner Broadcasting System TV channels. They are also putting cash on the line, agreeing to "provide certain financing guarantees to afford the merged company financial flexibility to address its future capital needs and growth plans."

Columbia House and CDNow will continue their own operations under their own names. However, they will combine their inventories to improve purchasing power and fulfillment efficiency. Columbia House sells more than 15,000 music titles per year, while CDNow sells more than 500,000.

The new company will have a 12-member board of directors: Four will be appointed by Sony and four by Time Warner, joined by CDNow President Jason Olim, two independent directors, and the CEO of the new company. The CEO has not been named.

Columbia House posted 1998 revenues of $1.4 billion and pre-tax earnings of about $100 million. CDNow reported $98.5 million in revenues last year and expects revenues of about $71 million during the first six months of 1999. However, the company said Tuesday it expects to report a net loss of about 83 cents per share for the second quarter of 1999.