Online Music Vendors Hit a Sour Note on New Venture

A new joint venture between BMG and Universal Music has contributed to falling shares in Amazon.com and CDnow.
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SAN FRANCISCO -- Amazon.com's (AMZN) - Get Report formidable success in online retailing is attracting many new players eager to cash in on the profitable, growing industry. Bertelsmann's BMG Entertainment and Seagram's (VO) - Get ReportUniversal Music today set a cyberspace joint venture called GetMusic. Their new entry adds yet another competitor to the field, though it remains to be seen how much of a threat it will pose to Amazon.

The venture will consist of online music channels and an e-commerce site on the Web. It will build on BMG sites already online, including

Peeps.com

for rhythm-and-blues,

Bugjuice.com

for alternative music and

Twangthis.com

for country music. Those sites will link users to GetMusic.com. BMG also is an investor in

barnesandnoble.com

, part of

Barnes & Noble

(BKS) - Get Report

, which competes with Amazon.com in Internet bookselling.

Derek Brown, Internet analyst with

Volpe Brown Whelan

, said the venture already faces some stiff competition in Amazon.com and

CDnow

(CDNW)

.

"Just by looking at the service, it's clear they're working to compete directly against Amazon.com and CDnow and other music vendors," said Brown. "Will they be successful? That's very much an open-ended question at this point. They certainly have the roster of music creators on their side, but they still have to draw consumers to their storefront, and as we've seen in other industries, that's easier said than done."

The new venture "is facing some very significant competition and fairly entrenched competition in the form of Amazon.com and CDnow," Brown said. It also needs to be careful that it does not "alienate its retail partners. They kind of need each other."

Brown said the news has contributed to losses in both Amazon.com and CDnow today, though much of the Internet industry is seeing some profit-taking ahead of

Yahoo!'s

(YHOO)

earnings report after the close. Amazon.com was down 7 3/8, or 4%, at 175 1/2. CDnow, which recently merged with

N2K

to try to provide a more formidable

threat to Amazon.com, was down 1 5/16, or 8%, at 14 3/4.

Seagram, a partner in the GetMusic venture, was up 3 3/8, or 6%, at 58 5/16.