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CDnow, MTV in $22.5 million deal

The Net music retailer will pay the network $22.5 million over three years for a content and marketing alliance.

MTV Networks and Net music retailer CDnow today became the latest content and commerce players to enter a broad, money-soaked alliance.

CDnow will pay MTV $22.5 million in cash and stock over the course of the three-year deal, which involves event sponsorships, online and on-air advertising, Net music retailing, online content sharing, and cross-promotions, the firms said.

CDnow, which went public in February, is considered one of the better-known brands in the crowded Net music space. It competes directly with N2K's Music Boulevard store, which recently inked deals with Ticketmaster and America Online in Europe.

Also getting into the increasingly crowded Net music space are veteran content site Ultimate Band List and TV network NBC; Net bookseller Amazon.com recently began its much-anticipated music sales efforts as well.

Notably, MTV is a subsidiary of media behemoth Viacom, which also owns movie and music firm Blockbuster. Blockbuster Music offers e-commerce on its Web site. But that has not kept the music network from partnering with other Net music retailers--it has entered into several deals with Music Boulevard, for example--most recently in an international arrangement earlier this year.

Although Net music retail deals have commanded large sums historically, retailers face a tough challenge. Margins for music sales are low, and Net players have lowered them further to gain market share by offering deep discounts and covering shipping, for example.

With all of CDnow's success in building a brand and Wall Street's love for all things Net and music, the retailer has not been without financial challenges. In April, it reported quarterly earnings that missed analysts' estimates--the firm reported a loss of $9.2 million, or 78 cents per share, vs. the 67 cent-per-share loss predicted by analysts, according to a report by First Call.

Last week, CDnow filed with the Securities and Exchange Commission (SEC) for a secondary public offering of 2.875 million shares, valued at $71.5 million. The firm said the proceeds would go toward sales and marketing expenditures, among other expenses.

CDnow declined to comment, citing a "quiet period," a time in which the SEC forbids a firm to disclose any information not previously filed publicly that could be interpreted as hyping the company's stock.

The still-growing Net music firms for now have Wall Street's confidence--but analysts and investors are not known for their patience when it comes to companies turning a profit. If firms such as CDnow continue to enter these expensive arrangements and miss earnings estimates, the honeymoon could end abruptly.

Under the terms of today's deal, CDnow e-commerce offerings next month will be integrated into MTV Online and VH1 Online. MTV and VH1 reviews and music news will be featured on CDnow along with a real-time "Now Playing" ticker with current programming on the two channels. The firms said CDnow will be the exclusive Net music retailer for the 1998 MTV Video Music Awards--but the deal overall is not exclusive. CDnow also will sponsor other MTV and VH1 events.