TOPICS > Nation

Time Warner-EMI to Merge

January 24, 2000 at 12:00 AM EDT

TERENCE SMITH: Today’s deal was announced in London by EMI’s Eric Nicoli and Time Warner’s Richard Parsons.

RICHARD PARSONS: This is a match made in heaven. It’s going to create value not only for EMI shareholders, but for Time Warner shareholders, and we would argue for artists who will be a part of our company going forward, and for the employees.

TERENCE SMITH: The combined music company, worth $20 billion, would be the world’s largest, and would concentrate most of the industry into four major players, including Universal, Sony and BMG. Today’s merger brings some 2,500 musicians under one Time-Warner EMI roof. EMI’s recording stars include Garth Brooks …

MUSIC IN BACKGROUND: Tear it up and burn it down …

TERENCE SMITH: The Rolling Stones …

FRANK SINATRA: Start spreading the news …

TERENCE SMITH: … and Frank Sinatra. Warner Brothers’ stable includes Madonna…

MADONNA: I can feel the magic …

TERENCE SMITH: … and Faith Hill. EMI’s artists are represented by various record companies owned by the London-based company, including Virgin, Capitol and Chrysalis. Time Warner’s record labels include Atlantic, Elektra and Warner Brothers. For Time Warner, the deal extends just one branch of the mega-company’s corporate family tree. Its other industries include film, magazines, television and most recently, the Internet. Two weeks ago, Time Warner announced it would be acquired by Web giant America Online in a $145 billion deal.

KID ROCK: You can be a cowboy, baby …

TERENCE SMITH: Both Time Warner and EMI, like other music companies, are working to take advantage of the Internet. Online music sales in the U.S. are projected to grow more than tenfold in the next five years, to more than $2 billion annually. They are also trying to capitalize on new digital technology — one is known as MP3 — that compresses data in a way that lets computer users hear CD-quality music via the Web. Digital MP3 music can also be transferred to a portable player about the size of a pager. This latest mega-merger must be approved by regulators in the United States and Europe.

Two music industry watchers join us now: Chris Dixon, senior media analyst at Paine Webber; and Bruce Haring, a reporter for “USA Today,” and author of “Off the Charts: Ruthless Days and Reckless Nights Inside the Music Industry.” Bruce Haring, another week, another merger, another media merger. What’s the significance of this one?

BRUCE HARING: Well, bigger is not necessarily better. Aside from some back office efficiencies, it’s more of the same. There’s going to be some jobs lost, and there’s going to be some artists who are going to be out on the street.

TERENCE SMITH: Out on the street. Why?

BRUCE HARING: Well, the way these things work is basically that marketing and promotion people seem to get axed, and then they’re assigned fewer and fewer acts to work. As a consequence, there’s efficiencies in the corporate world. That’s what they term them.

TERENCE SMITH: Efficiencies. All right. Chris Dixon, what’s the financial logic and significance from the financial point of view of this arrangement?

CHRISTOPHER DIXON: Well, this is really an affirmation of the changes that are going on in the music industry at large, the emergence of technology, the role of the Internet, new digital platforms. Companies are looking to — how can they restructure themselves and take advantage of these new technology developments and become part of a truly global platform. So this is really in the wake of what we saw last year with Universal and Polygram. And it’s really not insignificant that this took place two weeks after the announcement that AOL and Time Warner would merge.

TERENCE SMITH: What is the link between the two?

CHRISTOPHER DIXON: Well, I think the key is that AOL has been very, very focused on bringing you consumer friendly products. You’ve got mail. You’ve got pictures. Now we may see something like you’ve got music. And as the Internet develops and moves from a digital text pace to a much more television-like world, services like music, services like television and video — parts of Time Warner’s library — are going to become a much more integral part of the way that we’re entertained and the way we use computers.

TERENCE SMITH: Bruce Haring, can you paint the picture of the future for us here, how people in this digital age will sample, receive and acquire music in the future?

BRUCE HARING: Well, see, it’s still being painted. Right now we’re not sure whether digital downloading, which means that the customer can keep the music or streaming, which means you’ll just be able to listen to it, is going to be the form that you’ll be able to receive your music at. We’re not even sure whether these companies will be able to sell music. There are certain technologies out there now, Master is one, Tevo is another, that sort of circumvent copyright laws. As a result, it’s sort of unclear now whether they’ll be able to make money online.

TERENCE SMITH: It sounds as though these companies are betting on that future.

BRUCE HARING: They’re betting on it, but again, it’s unclear. There’s a whole world of people out there who have been conditioned to get music for free. Whether or not they’re willing to break that habit and with whether or not companies can solve the technological hurdles that they still need to do in order to sell music online remain to be seen.

TERENCE SMITH: Chris Dixon, can you imagine a day when people will, in fact, download albums in their computers and actually create their own CDs?

CHRISTOPHER DIXON: I think it will. I mean, there’s no question that copyright issues are a significant issue, but now with four players sitting down around the table looking to set standards, design, interoperability, I think you’ve seen this world that we’ve all kind of dreamed about has been accelerated. We will see it. We’ll see it sooner rather than later. Today’s announcement is a step in that direction.

TERENCE SMITH: Bruce Haring, from the consumer’s point of view, what’s the significance here?

BRUCE HARING: Well, you have to be a little concerned every time something like this happens. For instance, Time Warner has been known as a company that rejected gangsta rap a few years ago when they had the controversy with Ice-T and Cop-Killer. One of the main engines driving EMI music is Priority Records, which is a gangsta rap label. They also have a distribution with Master P, which is another company that that puts out music. Are these going to regain that music in this new world order that they have? That’s one question. The other question I have is big companies like this tend to focus on the hits through the exclusion of things that may be a little less mainstream. Are they going to maintain the next Bob Dylan or Bruce Springsteen and let them develop over three albums? It’s questionable.

TERENCE SMITH: Right. In fact, are you therefore assuming that artists might be discouraged or find it more difficult to find their audience?

BRUCE HARING: They may find it more difficult to stay with a company that’s huge like this. However, one of the beauties of the Internet, if, in fact, some day it does develop a method of selling music online, it allows a one-to-one relationship between the artist and consumer. How that develops remains to be seen, but it is a direct pipeline that didn’t exist before.

TERENCE SMITH: Chris Dixon, do you share Bruce’s skepticism about the impact on the consumer?

CHRISTOPHER DIXON: To a degree. But I think it’s important to recognize that the A&R function, the artist and repertoire, is going out and finding new artists, is changed. It’s no longer about going down to clubs. If you’re a record label executive, now you can listen to the tunes that have been put up to you across the Internet. And really the role of the large labels is much more about marketing and financing and really distributing acts on a truly global basis. So, yes, there may not be the same focus on the early artists, but the reality is, the way the industry has developed today, that particular role is being consumed by an enormous amount of independents. And the major studios and major labels are in the business of marketing and financing.

TERENCE SMITH: Chris, when the AOL-Time Warner merger was announced, Gerald Levin said music is one of the major driving components here. Why? What did he mean by that?

CHRISTOPHER DIXON: Well, the key thing here is bandwidth. As we move into high-speed Internet, music is particularly adaptable. It doesn’t have the bandwidth requirements we see in film or television. So you can use music as a way — as a beta test — kind of that canary in the mineshaft, if you will, as to what the new world of the Internet is going to look like for entertainment product. There’s no question that music is not only global, but it can be distributed quite easily into a broad array of devices. So this is a way to test what the real potential for the Internet can be for entertainment.

TERENCE SMITH: Bruce Haring, of course, the other partner just off to one side, is AOL. Is AOL going to become in effect the portal for EMI-Warner music?

BRUCE HARING: Well, that would be the logical assumption, however, you’d have to wonder whether AOL itself is going to be able to withstand the forces. There’s a lot of companies out there that are giving away Internet access now, which as I understand it is the main basis of AOL’S profit. Will they be around or will they be forced to merge with somebody? That’s a good question.

TERENCE SMITH: And might they become the agent of sales down the road?

BRUCE HARING: Perhaps. But again, this is something that is a barrier that needs to be crossed. Everyone’s assuming that it’s going to happen now that these two companies have merged, but there’s some significant issues, not the least of which are technological hurdles. Most people in this country get their online access through a telephone line right now, a 28/8 baud modem which takes well over an hour to download an album, and that’s if it works the first time. There’s also security issues. It’s a long way to go before we have this grand day where albums are being sold freely over the Net.

TERENCE SMITH: Chris Dixon, what do you think about that, what are the probabilities here?

CHRISTOPHER DIXON: Well, I think that’s right. But by the same token, on the face of it, this is a terrific deal for the music industry at large. What you’re seeing is the new company will now have 24 to 25 percent market share in the U.S. You’ve got a management team that’s worked together in the past. It fits quite well in terms of the international U.K.-based operations that exist at EMI, the more U.S.-focused operations in the U.S. And also, given the success that we’ve seen at Universal, their ability to integrate Polygram and create cost savings there, this is also a natural reflection of the ongoing need to consolidate and create a truly global oligopoly, a Japanese player, a German player, and now a U.S.-U.K. player.

TERENCE SMITH: In the face of this oligopoly, Bruce, what’s the impact on independent producers and independent labels?

BRUCE HARING: Well, there’s a false assumption here that bigger necessarily means smarter. It’s the same people that will be choosing the acts. And Warner Music and EMI are sort of lagging in that department. They haven’t been grand hit-makers except for a few scattered acts. So, actually, there’s a ripe opportunity out here as the huge dinosaurs get even harder and more unwieldy, they can’t turn very well. New opportunities are out there for people who are going to seize them.

TERENCE SMITH: OK. Thank you both very much.