Song swapping leads to BMG, Sony merger

Boris Groendahl and Derek Caney

FRANKFURT/NEW YORK: Sony Music and BMG said that they plan to combine their music units in a move that could trigger further consolidation as the industry grapples with weak retail sales, online file-sharing and fierce competition with other forms of entertainment.

The 50-50 joint venture combines No. 2 Sony, which includes such artists as Beyonce Knowles and Bruce Springsteen, with No. 5 BMG, a unit of German media firm Bertelsmann that is home to Britney Spears and Elvis Presley. It creates a powerhouse that rivals leader Universal Music Group.

The deal vaults the companies ahead of Time Warner Inc.'s Warner Music Group and EMI Group Plc, which are discussing a combination of their own.

"If (Sony and BMG) stood alone, we would have to cut artist rosters and even closing activities in smaller countries," said BMG chief executive Rolf Schmidt-Holtz. "This merger is the best guarantee that we can maintain a broad roster of artists in the current environment."

In the last few years, music sales have declined as the weaker retail market has combined with growing use of file-sharing services such as KaZaa, which the industry views as havens of piracy. CD sales have also suffered as prices of DVDs, video games and other types of entertainment have fallen.

"No one knows when the industry will recover or if the industry will recover," Schmidt-Holtz said. "We are hit by the retail situation and illegal activity around file-sharing."

While several online services like Apple Computer's iTunes have created a Web business model that the labels can live with, it will not be enough to save the industry without consolidation, he said.

Bertelsmann Chief Executive Gunter Thielen said neither side would contribute a cash payment to make up for differences in valuation.

A final agreement, which will exclude the companies' publishing and manufacturing operations, is expected within several weeks, after which it will go before competition watchdogs on both sides of the Atlantic.

Sony Music's Andy Lack will be chief executive of the venture and BMG's Rolf Schmidt-Holtz will become chairman.

EMI TUNES UP $1 BILLION PACKAGE

The Sony-BMG deal comes as banks put the final touches to a $1 billion funding package to pay for EMI's bid for Warner's recorded music unit, sources close to the situation said.

Separately, U.S. media billionaire Haim Saban and former Seagram Chairman Edgar Bronfman Jr are also exploring a bid for Warner Music, sources familiar with the situation have said.

One source familiar with the matter said Time Warner is in discussions with several different parties. "Time Warner has a number of alternatives available to it," the source said.

Another source said, "Every offer is getting serious consideration, but a strategic partnership with another music company would give them a better competitive position." Others noted, however, that a Saban-Bronfman-led acquisition of Warner would clear regulatory hurdles more easily.

A combination between EMI, the world's third-largest record company, and Warner Music, the fourth-largest, would put the Beatles and Frank Sinatra under the same roof with Madonna and Norah Jones.

WILL REGULATORS STOP THE MUSIC?

Time Warner and EMI declined to comment, but it could be difficult for both deals to clear regulatory hurdles.

"It seems unlikely that the EU is going to allow the music industry to go from five companies to three," one music industry source said. "Do both deals get rejected? Should Warner and EMI even bother announcing anything? Or should they race to announce something as a defensive move?"

BMG's Schmidt-Holtz expressed confidence the deal would be approved. "There's no disadvantage in being first," he said. "But under the extreme situation of the music industry and the competition, we are optimistic we can convince regulatory bodies to approve this deal."

He noted that by excluding the publishing and manufacturing business, the deal was likely to have an easier path to regulatory approval.

Sony BMG would rival market leader Universal Music's 25.9 percent share of global music sales, with a share of 25.2 percent based on 2002 sales, while a combined EMI-Warner Music would have 23.9 percent.

Both European and U.S. competition watchdogs have blocked earlier attempts to merge two of the world's top five music labels.

The firms are looking for more favorable treatment this time around, however, hoping that regulators will factor in the industry's dismal condition.

(Reuters