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Bertelsmann, Sony to Merge Their Music

November 6, 2003

LOS ANGELES (AP) _ Sony Corp. and Bertelsmann AG said Thursday they planned to merge their music businesses, a deal that would consolidate the embattled recording industry down to four major companies.

The proposed merger would bring together the world’s No. 2 and No. 5 music companies at a time when the recording industry is struggling to stem a three-year slide in CD sales and cope with the impact digital technology and the Internet have had on its business model.

The new company, to be called Sony BMG, would be equally owned by Sony and Bertelsmann and run by Andrew Lack, chairman and chief executive of Sony Music Entertainment. Rolf Schmidt-Holtz, the chairman and chief executive of BMG, would serve as chairman of the board.

The deal, which would have to win approval from U.S. and European regulators, would unite Sony and BMG’s recorded music business but would exclude music publishing, physical distribution and manufacturing.

Bertelsmann didn’t say whether the companies had agreed on financial terms in their letter of intent or what issues remained to be worked out before a final agreement could be struck. The companies agreed to hold exclusive talks, said Patrick Reilly, a spokesman for BMG.

In a letter to BMG employees obtained by The Associated Press, Schmidt-Holtz said the venture should be completed in the ``coming weeks and months.″

A spokesman for Sony said Lack was traveling and couldn’t be reached.

The deal would put some of music’s biggest stars under a common corporate roof. Sony Music Entertainment’s labels include Columbia, Epic, and Sony Classical, and it is home to artists including Bruce Springsteen, Beyonce Knowles and Celine Dion.

Among the stars on BMG’s various labels are Dido, the Dave Matthews Band, Christina Aguilera, Alicia Keys, Avril Lavigne and the late Elvis Presley.

The music industry has been in a state of flux because of illegal online music sharing and CD burning as well as an ongoing shift away from CDs and toward a more mobile, digitally based means of listening to music. Consolidation should help Sony and BMG better deal with industry changes as they shed excess staff and unprofitable artists from their rosters while pooling their bankable acts.

``The integration of BMG’s roster of artists into the Sony roster will certainly yield some more mega artists for Sony Music, which in turn will give them a greater possibility of profit,″ said Michael Goodman, media and entertainment analyst at the Yankee Group.

The other three major record companies _ industry leader Universal Music Group, EMI Group PLC of Britain and Warner Music Group _ also have been contemplating consolidation.

EMI is in talks about the possibility of buying Warner Music Group from Time Warner Inc., three years after European regulatory opposition ended their discussions about a possible joint venture.

A Sony-BMG merger is likely to increase pressure on the other music companies to merge to remain able to compete through the technological changes the industry is undergoing, said Don Gorder, chair of the Music Business-Management Department at the Berklee College of Music in Boston.

``It’s become a very competitive market and everybody, all of the major companies, are searching for that equilibrium that the onslaught of digital dissemination has taken away for the time being,″ Gorder said. ``You have people now at the helm of these companies who realize the only way they’re going to survive is if they cut and operate lean.″

But if Sony and BMG complete their merger first, some analysts say, it could lead to regulatory hurdles for the others.

``It’s a fairly consolidated business to start with, so that any time you have further consolidation in the market, that is something that regulators are going to take a very hard look at,″ Goodman said. ``That’s going to put a further damper on any consolidation plans the others may have.″

Conversely, some antitrust lawyers said changes in the market could mean Sony and Bertelsmann would have an easier ride than Warner Music and EMI had. European Union regulators opposed the deal out of concerns it would lead to an oligopoly of four firms controlling 80 percent of the European market.

``I’d imagine that it’s a totally different market today than it was when the (European) Commission last reviewed it, particularly the advance in the ability to download music over the Internet,″ said Mark Powell of White and Case in Brussels.

Given declining sales and profits, Sony and Bertelsmann may argue that they need to be bigger to survive, Powell said.

Sony BMG would have a combined global market share of 25.2 percent, according to the market measurement firm IFPI, just behind the 25.9 percent share held by Universal Music Group, which is part of the French conglomerate Vivendi Universal.

In the U.S. music market, however, the combined company would edge out Universal as the largest, based on the most recent figures available from Nielsen SoundScan. Sony and BMG have a combined 28.3 share of U.S. sales, versus 27.8 percent for Universal, according to SoundScan.

The board of the new company would be split, with an equal number of directors from each partner, and senior executives from both groups would join the venture.

Sony shares fell 85 cents to close at $35.92 on the New York Stock Exchange on Thursday. Bertelsmann is privately held.


AP Business Writers Paul Geitner in Brussels and Seth Sutel in New York contributed to this report.

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