US firm Loudeye is buying Europe's OD2 digital music distribution service for $38.6 million in cash and stock, the companies announced yesterday.

The move comes as OD2 prepares to battle for market share in the emerging industry against Apple, Napster and Sony Connect in Europe. In preparation for this war, OD2 hired investment bank Broadview International to help it explore funding options, including the sale.

The report explains payment is in the form of $20.7 million guaranteed in stock and cash and "about $17.5 million" over the next 30 months.

Succumbing to Loudeye's embrace means OD2 has won access to the lucrative North American market through Loudeye's existing partners there, and extends Loudeye's reach in Europe.

The company seeks to move into mobile phone download and video services in future, this report claims. It also intends to expand its catalogue to offer 1.3 million songs in the next six months.

"By combining with OD2, the leading digital music service provider in Europe, we become the largest business-to-business digital media provider in the world with the largest licensed digital music catalogue in the industry," said Jeff Cavins, Loudeye's president and CEO.

OD2 co-founder and CEO Charles Grimsdale said: "OD2 and Loudeye share virtually identical goals, vision and passion for the future of digital music and I see tremendous opportunities for our combined company to drive digital media deployments worldwide.

"Our proven success managing the specific challenges of pan-European digital media deployments will be a strong asset for Loudeye and significantly raises the barriers to entry for other service providers looking to enter the European market. Furthermore, Loudeye will enable us to offer a much broader range of new services to our current customers and extend our capabilities into such fast growing areas as the wireless arena," Grimsdale added.

Sales growth

Annual sales of recorded music in Europe were $11 billion in 2003, with the digital download and subscription market segments growing very quickly. Forrester Research is forecasting that digital music sales in Europe will experience significant growth rates over the next three years, reaching approximately $1.6 billion by 2007.

Grimsdale becomes the president and managing director of the combined company's international business operations, effective immediately. The senior executive team of OD2 has also entered into employment agreements.

OD2 employs approximately 80 people and is headquartered in Bristol, United Kingdom, with offices in London, Paris, Cologne, Milan and Amsterdam.

Musician, Apple Master and co-founder of OD2 Peter Gabriel said: "I co-founded OD2 with Charles Grimsdale as I thought there were many exciting opportunities for digitally distributed music.

"As a musician, I believe strongly that all artists should have access to this powerful new means of getting music to people. I'm delighted with OD2's extraordinary achievements. It has created the most successful European platform for the distribution of music from independents and majors alike. By combining with Loudeye, we create the world's largest licensed catalogue of music available for digital distribution. I believe this combination can deliver the best digital music service for both consumers and labels that is also committed to being fair to artists."