February 15, 2000 5:30 PM PST

Major music suppliers team to promote digital downloads

Two major music suppliers, Valley Media and Amplified.com, today announced that they will merge in a move that could hasten the adoption of digital downloading as a means of commercial distribution.

A leader in its field, Valley Media distributes CDs, cassettes, videos and DVDs to more than 200 nationwide retailers, including the Wherehouse and e-commerce sites such as Amazon.com and CDNow. Amplified supplies more than 200,000 digital music tracks to many of the same customers' Web sites.

Now the companies will combine their catalogs, allowing e-tailers or stores with kiosks to let consumers hear samples and read descriptions of all the songs in their database. The value of the merger was not disclosed.

"This is a very exciting merger of the digital and physical worlds of music distribution," said Wayne Parker, president of Amplified.com. "This merger will speed the availability of digital downloads and make it easier for people who want to sell music online and for artists and record companies that want to distribute music this way."

Although Valley Media is the more established company, merging with privately held Amplified could help usher its business into what many see as the future of music distribution: digital downloading. Valley already has relationships with the "Big Five" record labels--Warner Music, Sony Music, Universal Music, BMG Entertainment and EMI Group--which are tackling how to deal with Net consumers' growing interest in audio encoded in MP3 and other digital formats.

Web sites pushing independent label music and unsigned artists are abundant. But the most popular artists' music has only been licensed for select promotions or to Net radio sites, which don't allow consumers to download it for replay.

The major labels have been reluctant to digitize their songs and post them online for various reasons. They only want their music encoded in secure formats that help curb piracy, and they don't want the less expensive digital music to undermine healthy CD sales.

The merger announcement comes the same day that Valley reported earnings below analysts' expectations, according to First Call. Valley Media's third-quarter net income was $1.1 million, or 12 cents per share, compared with $4.8 million, or 85 cents per share, in the year-ago period. Wall Street analysts polled by First Call expected an average of 33 cents per share.

Valley did see an increase in business through Net retailers, the company reported. New media sales increased 47 percent to $91.2 million from $61.9 million in the third quarter of last year.

"(Valley) missed their numbers Net music waits for its cue (year in
review)every which way, but they seem to know that they have to get back to excellence in execution," said Rich McDonald, an analyst with J.P. Morgan, adding that the merger with Amplified should bolster its online business.

"Strategically it makes a lot of sense," he said. "The studios all find it easier to work with one (distributor) instead of hundreds."

The merger is expected to close in 30 days. Both companies will continue to operate under their current names, and each will get a 50 percent stake in the combined company.

 

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