Sony Music, Time Warner Buy CDNow

Deal puts major online retailer in hands of labels that are home to Madonna, Ricky Martin, Pearl Jam.

Sony Music and Time Warner became the second pair of major-label corporations this year to enter the online retail business with the announcement Tuesday (July 13) that they would acquire Internet music sales giant CDNow and merge it with their mail-order record club, Columbia House.

The companies have no plans to change either CDNow or Columbia House, but will use the record club to push customers toward the online store, said Paul Vidich, Time Warner's executive vice president of strategic planning and business development. And the acquisition may help them distribute music by download in the future, he said.

"One of the subtleties here is that, with online retail there is the potential for the digital distribution of music through those sites," he said.

Otherwise, Vidich characterized the CDNow deal as an extension of what the labels have been doing for more than a decade with their mail-order venture.

"These clubs really are direct-marketing enterprises," he said. "Each of the majors has been in the business for a long time. This is really not a shift."

In April the Universal Music Group and BMG Entertainment announced they would invest in a new online music store called Get Music (www.getmusic.com).

Both ventures would appear to put the labels in competition with the stores that sell their records. But a spokesperson for Musicland Stores Corp., a Minneapolis company that owns Sam Goody, Media Play and other retail chains, said he doubted the new venture would interfere with retailers' business or their relationship with the labels.

"We don't see it as changing the competitive environment," Musicland's Brant Skokrand said. "Columbia House already had its own website. This is just another step by everyone toward embracing e-commerce."

Hilary Rosen, president and CEO of the Record Industry Association of America — the industry's chief lobbying arm — said she could envision the major labels being ready to offer regular downloads by the end of the year. In the meantime, she said, their ownership of online stores gives them a good forum to test the way they sell music to customers.

"It's an opportunity to test out marketing concepts — not exclusive of other retailers, but concepts outside stores might not buy into," Rosen said.

Rosen and Vidich said neither the purchase of CDNow nor the formation of Get Music means the labels are shying away from traditional record stores. Rosen said the labels would continue to sell and promote their products the way they always have.

Sony, whose artists include Ricky Martin, Pearl Jam, Lauryn Hill and the Offspring, and Warner Bros., whose roster includes Madonna, the Red Hot Chili Peppers, Kid Rock and Busta Rhymes, have tried to establish an online retail site before. Their first effort, Total E (www.totale.com), launched in 1997 but has never been successful, Vidich said.

The CDNow acquisition was a matter of the two labels' wanting to have something functional in place immediately rather than trying to rebuild Total E, Vidich said. Sony and Time Warner have co-owned Columbia House for 10 years.

CDNow, based in Fort Washington, Pa., boasts more than 2 million customers. Earlier this year, CDNow absorbed another online retailer, Music Boulevard.

Columbia House has 16 million members.