Time Warner looking at CDNow?
The conglomerate may use CDNow as centerpiece in an e-commerce play.
By John Motavalli, ZDNN
CDNow, one of the leading music shopping sites on the Internet, has had talks with Time Warner about a possible investment, according to a variety of sources.
Time Warner (NYSE:TWX) has already stated its intention to dramatically step up its efforts in e-commerce, where it currently lacks a major presence. A company spokesman said that the company was talking with "a lot of people in the Internet sphere," though he would not give specifics.
Survey: Net will change music business
Facing the (digital) music
When pressed on Time Warner's e-commerce direction, the spokesman, Ed Adler, did say that "you will see some announcement from us in the next couple of months. I'm not prepared to say what that will be."
CDNow recently announced a merger with N2K Inc., which runs online music store Music Boulevard. Observers see the CDNow/N2K merger as a defensive move taken to fight back against Amazon.com, which began selling music this summer, and Bertelsmann, which invested $200 million in Barnesandnoble.com, which has also begun selling music online.
Amazon the biggest
Amazon.com has quickly become the largest online music retailer, according to a recent report by investment firm Donaldson, Lufkin & Jenrette. DLJ noted that Amazon.com sold $14.4 million in music sales in the third quarter, well above DLJ's $6 million estimate.
CDNow may be attractive to Time Warner because it would cost substantially less to invest in than buying a chunk of Amazon.com, whose current $15 billion market capitalization is almost a quarter of Time Warner's $61.2 billion. It also has a well-known brand name online.
A call to CDNow CEO Jason Olim was returned by David Capozzi, general counsel for the company, who said only "we don't confirm or deny that kind of story."
Merger impact
It's unclear exactly what impact an investment by Time Warner in CDNow might have on the not-yet-completed N2K merger. A source close to the situation noted that there are several clauses in the merger agreement that might be triggered by an investment of this type, leading to possible complications at closing, but some observers still think the merger will close on schedule.
It's also unclear how CDNow would fit into Time Warner, a sprawling conglomerate. For example, Time Warner owns half of Columbia House, a record and home video club that offers a Web site for its members. Columbia House operates a little-known online music store Total E, which doesn't use the club model.
Time Warner also operates a major record company, of course, and a home video operation. A host of record companies, in announcing their new Secure Digital Music Initiative (SDMI) venture this week to come up with a standard for selling music online, said they want to get into direct sales of their music over the Web.
Looking for leadership?
Some believe that, if Time Warner does invest in CDNow, it may be to grab its CEO, Jason Olim, and charge him with setting up and running a new e-commerce division of the company. In September, Time Inc. spokesperson Peter Costiglio told Reuters that the company was looking for an individual to do that, and Olim certainly qualifies as an experienced e-commerce executive. CDNow is also located in Pennsylvania, close to TW's fulfillment operations for its Book of the Month Club, a huge direct marketing operation.
A Time Warner source noted that Don Logan, who heads Time Inc., was spearheading its current e-commerce project.
"A move like that would be a bold signal" said James McQuivey, an analyst at Forrester Research in Cambridge, Mass. McQuivey said that an outsider like Olim might be good for Time Warner, since he'd be free from the internecine strife that plagues most media companies' online divisions. On the other hand, internal staff might look at Olim as someone without a lot of business experience, and not respond to him.
Needs a brand name
Nonetheless, McQuivey and other observers agree that Time Warner needs an established brand like CDNow to compete in the rapidly consolidating e-commerce space.
Top executives at some related TW divisions said they weren't aware of the talks. According to Rick Hunt, a Columbia House vice president, "I don't know anything about that." He added that total traffic to Columbia House's sites surpassed that of CDNow and Music Boulevard, respectively, according to the measurement service Media Metrix. But much of that traffic may come from the 14 million members of Columbia House, who have simply switched to online usage over standard direct mail ordering. Hunt would not say how much of this traffic goes to Total E, which is not part of the club model.
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