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Online Retailers Team up in Series of Deals

A proposed merger of online music retailers N2K and CDNow and a joint venture by bookseller Barnes & Noble and Bertelsmann AG announced this week will bolster competition for e-commerce titan Amazon.com.

Bertelsmann, the German media conglomerate, will pay $200 million for a 50 percent stake in barnesandnoble.com. Each will contribute an additional $100 million and Bertelsmann will contribute certain resources from its yet-to-be-developed BooksOnline service to boost barnesandnoble.com's growth. There are additional plans to develop a global network that will sell books online in all major languages. Bertelsmann will continue to pursue the start-up of BooksOnline in Europe while barnesandnoble.com, a subsidiary of Barnes & Noble, New York, has temporarily postponed an initial public offering. Bertelsmann's U.S. publishing houses and mail-order book clubs won't figure in the joint venture.

“Bertelsmann, being the largest publisher in the world and also a direct marketing expert, is really going to bolster Barnes & Noble,” said Maria LaTour Kadison, senior analyst at Forrester Research, Cambridge, MA. “It will help [Barnes & Noble] with their back-end fulfillment, buying power and help them become database marketing experts immediately.”

And it will help Bertelsmann bypass the task of building an Internet infrastructure.

Barnesandnoble.com says it has more than 700,000 customers in 175 countries, compared to 3.14 million customers in 160 countries for Amazon.com, Seattle. While barnesandnoble.com generated sales of $22 million for the first six months of the year, Amazon's combined revenues from books and CDs, which it started selling in June, topped $203 million.

Amazon purchased a British online bookseller earlier this year and has released plans to expand its e-commerce channel to Great Britain and Germany. An Amazon spokesman said the joint venture would have no effect on its business strategy and it will continue to focus on providing the best customer experience in e-commerce.

“Amazon is an incredibly progressive company and rightly so paranoid from the beginning that they have a small window of opportunity to create a brand new brand name before traditional giants come in,” LaTour Kadison said. “The window of opportunity is pressing down on their back.”

Meanwhile, the planned merger of CDNow, Jenkintown, PA, and N2K, New York, would create an online music retailer controlling an estimated 45 percent of the market. The combination entity, which reportedly would retain the CDNow brand, would be the exclusive music retailer at five major Web portals — AOL, Yahoo, Lycos, Excite and Netscape — and maintain relationships with more than 100,000 affiliate sites, including MTV.

The deal, which both sides confirmed was under discussion, is expected to be completed in the next few weeks. It would combine roughly equal companies. CDNow had sales of $11 million in the last quarter and claims 569,000 customers while N2K, which sells through the Music Boulevard Web site, had sales of $10 million and 522,000 customers. A merger of the rival music sellers should save costs to customers by lessening the competition for placement on Web portals.

Shares of Amazon.com fell 14 7/8 to 93 7/16, when both deals were announced Oct. 7, while Barnes & Noble gained 1 5/16 to 24 7/8, CDNow was up 3/16 to 8 1/8 and N2K rose 1 to 5 1/2.

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