Merger in Works for BMG, Columbia House?

The world's two largest and most active music clubs may become one if preliminary talks between their parent companies bear fruit. Time Warner Inc. and Germany's Bertelsmann AG have conducted discussions with that outcome in mind, according to several reports appearing in late April.

Columbia House, jointly operated by Sony Music and Time Warner, could merge with Bertelsmann's BMG Direct if negotiations go smoothly. The two clubs dominate the mail-order music business, with deep catalogs in many categories, including jazz, classical, pop, rock, r&b, hip-hop, and country. The two operations have considerable overlap among their offerings, although they do not completely mirror each other. Unlike BMG, Columbia House offers DVDs and videotapes.

By eliminating duplication, a merger could bring a new efficiency to the music-club business, which has declined in recent years. Music fans have slowed their rate of acquisition, having gradually replaced most of their vinyl records with CDs, and online sales have taken a bite out of the market for new music. There is no indication that ordinary music lovers are at all dissatisfied with the quality of CDs, and almost no reason to believe that a high-resolution format such as Super Audio CD or multichannel DVD will make them replace their collections again.

Music sellers are therefore looking for creative ways to bolster the business for what may be leaner times ahead. The two giants' urge to merge has precedent in the publishing world. Pressure from online competitors has already brought about a merger of Time Warner's Book-of-the-Month Club with Bertelsmann's Doubleday Direct book club.

Last year's planned merger of online music seller CDnow and Columbia House fell through in March of this year, and executives have been looking for an alternate plan. If it comes to pass, the merger with BMG must be approved by Sony and by federal anti-trust regulators, who must also approve Time Warner's proposed merger with America Online. Columbia House, with about 16 million members, earned approximately $100 million on about $1.4 billion in revenue in 1998. BMG Direct's 11 million members spent about $400 million in 1999, accounting for about 20% of BMG Entertainment's North American revenue of $2 billion, according to the Wall Street Journal.