CDNow and N2K to Merge

The rumors were flying all week, and this time they proved to be true: CDNow Inc. and N2K Inc. jointly announced the signing of a definitive merger agreement on October 23. Both companies are well-positioned in the online music retail business, but face ever-increasing threats from new online rivals such as Tower Records and Virgin, as well as the ominous presence of who recently jumped into the online music business.

The merger will be effected through the formation of a new publicly traded company, initially to be called CDnow/N2K Inc., and is expected to be completed by early 1999, subject to approval by the shareholders of both companies, regulatory approval, and other customary terms and conditions. CDNow has also recently announced alliances with other online retailers in co-promotion agreements intended to reduce the cost of gaining new customers.

CDNow currently ranks first in number of music customers on the Internet, while N2K boasts the largest catalog of titles available. A recent survey conducted by eMarketer concluded that CDNow was the best place to buy music online, although N2K consistently sported lower prices. Both companies have created strategic alliances with dozens of companies such as AOL, Yahoo!, Netscape, MTV/VH1, and others. According to a statement about the merger, the companies believe that combining their websites will increase traffic while also creating a more attractive venue for advertisers.

The management of CDNow and N2K estimates that the combined company will have approximately 1.2 million customers ( has approximately 3.5 million customers---primarily book buyers at this point.) Combined net sales of CDNow and N2K were in excess of $75 million for the last 12 months, although both companies are still posting losses and have lost ground recently in the stock market. According to a recent estimate by Media Metrix, an Internet audience measurement company, the combined entity would rank #3 among online retailers. The newly united company will offer approximately 500,000 items.

Jon Diamond, co-founder and Vice Chairman of N2K, will be Chairman of the new entity. Jason Olim, President and Chief Executive Officer of CDnow, will be President and Chief Executive Officer of the merged company. N2K co-founder, Chairman and CEO Larry Rosen will become a member of the new Board of Directors, which will consist of four members from CDnow, three from N2K and two new members to be selected jointly.

"When we founded N2K, it was with a vision of using the power of the Internet to connect consumers directly to music in a unique combination of commerce, content and community," stated Rosen of N2K. "The merger with CDnow allows us to realize that vision, and positions the company for the exciting opportunities of a digital future. I am confident that Jon and Jason will provide the leadership to shape the rapid growth of the digital connection between music and consumers."

CDNow's Olim adds that "the unity of the two companies is powerful on all levels: strategic, tactical and financial. Strategically, with our combined alliances we achieve a ubiquitous position online. Tactically, the combined company will enjoy broad leadership in the most popular musical genres---Jazz, Classical, Country and Rock/Pop---which is but one example of the complementary nature of this merger. Perhaps most importantly, the merger creates opportunities for major cost reductions and new efficiencies that will be of benefit to our shareholders."