Cdnow, N2k In Possible Merger Talks

NEW YORK‹Confirming that they're in discussions about a possible merger, CDnow and N2K are on the verge of creating an online store that would have nearly half of the Internet music market.
But the World Wide Web companies‹which operate the two biggest players in electronic commerce for recorded music‹warned in a joint statement Oct. 7 that "no agreement has been reached and there can be no assurance" that one will be made (BillboardBulletin, Oct. 8).
Nevertheless, investors' belief that a deal was likely boosted both companies' stocks, which had been languishing near their all-time lows, on the day of the report. Shares of N2K, which is expected to be the acquired company, rose 22.2% to $5.50, giving it a market value of $78.2 million. Shares of CDnow went up 2.3% to $8.125, giving it a value of $132.2 million. CDnow's stock had been as high as $39 and N2K's $34.625 before concerns about competition in the marketplace brought them down.
Analysts say they didn't think that the run-up in the stocks after the talks were disclosed signaled a bidding war for either of the companies.
"It makes no sense to further fragment the market," says Steven Horen, senior analyst with NationsBank Montgomery Securities.
The market activity followed reports in The New York Times and The Wall Street Journal about a possible merger.
"It makes enormous sense," says Horen of the possible deal. "I think that having one powerful destination music-buying source on the Web will make for a very strong opportunity." He added that a deal would be favorable "from a strategic and an operating-leverage point of view."
Executives at CDnow and N2K declined to comment beyond the news release.
Some analysts believed that the merger talks were precipitated by the June entry of Amazon.com into the online music business. A successful seller of books over the Internet, Amazon said it had attracted 3.1 million total customers so far.
"We're focusing our attention on our customers, not our competitors," says Greg Hart, product manager for music at Amazon.com, of the possible pact.
But news of the potential CDnow-N2K merger was one of two blows delivered to Amazon.com Oct. 7 that made its stock plunge 13.7%. The other announcement was that Bertelsmann, one of the world's largest book publishers, was buying a 50% stake in Amazon's biggest competitor, Barnesandnoble.com, the online site of the Barnes & Noble chain (see story, page 10).
New players like Amazon.com, K-tel, and Platinum Entertainment have entered a fast-growing online music market. But CDnow and Music Boulevard‹N2K's online store‹have an estimated 45% of the market. Last year, according to the research firm Jupiter Communications, Internet music sales were $36.6 million. Jupiter projects online sales will be $87.8 million this year, but many observers believe they'll be higher.
For some time, industry observers have been predicting the consolidation of the online music market. In addition to the Internet companies, all the major bricks-and-mortar music retailers have either launched E-commerce sites or plan to. And the major record companies are also planning to sell their music online.
Because of competition from Amazon.com and other players, investment bank Bear Stearns said it lowered its rating on N2K's stock to "neutral" from "buy."
One published report said that CDnow's founders, Jason and Matthew Olim, would be taking over the combined company after the merger and that N2K's founder/chairman, Lawrence Rosen, would have some undefined role in the new concern.
A source who asked not to be identified said that N2K had approached at least one other company looking to merge or sell part of its business.
In addition to Music Boulevard, which has attracted 522,000 customers so far, New York-based N2K operates a label, N2K Encoded Music. Recently the company cut back on label operations and laid off 18-20 people. Phil Ramone, who had run the label, "will have a senior role in management involving music and technology," according to a spokeswoman. N2K has also created numerous genre- and artist-based Web sites with extensive editorial content.
CDnow's strengths include strong name recognition among consumers‹largely due to TV advertising‹and a custom-CD compilation business that it acquired.
A merger of the two companies wouldn't have much effect on the distribution of music to online customers. Both CDnow, based in Jenkintown, Pa., and Music Boulevard mostly use Valley Media of Woodland, Calif., for fulfilling U.S. orders.

Assistance in preparing this story was provided by Ed Christman.