Thursday, November 06, 2003

From the Big Five to the Big Three? Sony Corp. and Bertelsmann AG announced that they have signed a preliminary agreement t merge their recording subsidiaries. Sony Music is currently #2; BMG is #5 in the music industry. The new company would be owned equally by the two companies, and it would be called Sony-BMG. The deal would exclude Sony's Japanese music division and both companies' music publishing libraries. This announcement comes just as EMI group (#3) has assembled funding to buy Time Warner Music (#4) division. This deal would include Time Warner's music publishing business. These moves are an attempt by the cash strapped Sony and Time Warner to jettison money-losing businesses. Sony recently announced it would lay off 1,000 employees from the music wing, while cutting costs to the bone. EMI laid off 20% of its workers lately and BMG reported losses of 137 million euros for the first half of this year. Should these two deals go through, the number of recording companies would shrink from five to three, the third being Vivendi-owned Universal Music Group, which has been looking for a buyer as well. Of course, the real test is the reaction of US and European antitrust organizations. They have not looked kindly on mergers between the Big Five music companies. In 2000, a proposed merger between EMI and Warner Music was rejected by the European antitrust regulators. Those officials also nixed another recent proposed deal between EMI and BMG. The obvious hope is that the current distressed state of the music industry will make the regulators change their minds. According to a Wall Street Journal article ("Bertelsmann, Sony Agree To Merge Music Business", 11/6/2003): When the European Commission blocked the earlier EMI-Warner deal, it cited the theory of "collective dominance" -- that a market becomes less competitive if controlled by a small number of companies -- in saying that the music industry shouldn't be allowed to shrink to four from five big players. However, a recent court ruling may have taken away some of the power of the antitrust officials: In a case involving a British travel company called Airtours, the court said that the Commission couldn't just assert its theory, but had to actually show action on the part of the supposedly dominant companies to keep control of the market -- such as by sanctioning a company that steps out of line -- and also needed to show that smaller players couldn't actually get into the market. Given the steep decline in music sales -- coupled with online music delivery, both legal and illegal -- many experts believe that the Commission's earlier rationale is now obsolete. But the prospect of two big mergers may be too much, according to the Financial Times ("BMG and Sony agree on Music Joint Venture," 11/6/2002): Regulators in Brussels and Washington are extremely unlikely to wave through two deals that would allow four of the world's largest music companies to coalesce. Together, BMG and Sony would control 25 per cent of the global music market. A combination of EMI and Warner would control a similar percentage of the market. One thought is that the four companies are in a race to see who can get their merger proposal in front of the regulators first, on the theory that the second merger is less likely to be allowed. Sony and Bertelsmann have the head start, but their move may precipitate the Time Warner-EMI deal. These mergers and the cost-cutting at the studios is likely to give consumers even less choice of music, as the record companies even more than before stick with sure things and ignore innovators. But it's unlikely that putting sick companies together will produce a healthy one. A new Big Three may dominate, but it will be as vulnerable to complete disruption as it was before. 5:47:52 PM

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