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Sony, Bertelsmann Announce Plans to Merge Music Units

The merger of Sony Music Entertainment Music and Bertelsmann’s BMG would combine the world’s second and fifth largest music companies, bringing popular Sony artists, such as Bruce Springsteen and Beyonce Knowles, and BMG performers including Britney Spears, under a single label.

Sony and Bertelsmann on Thursday announced a nonbinding letter of intent to negotiate exclusively with each other in the weeks ahead to create a jointly-owned firm, to be called Sony BMG. No cash would be exchanged to complete the deal, which is expected to occur within two months, according to a press release from BMG and Sony.

The new company would claim roughly 25 percent of global music sales, placing it just behind industry front-runner, Vivendi’s Universal Music Group, which had roughly 25.9 percent of the world market share, according to last year’s music sales.

In the U.S., Sony BMG would control roughly 28 percent of all record sales, according to Nielsen SoundScan data.

Sony Music Chairman Andrew Lack would run the company as its chief executive officer and BMG Chairman Rolf Schmidt-Holtz would become chairman. The board of directors of the new company would be made up of an equal number of representatives from Sony and Bertelsmann.

Terms of the transaction were not disclosed, though neither company’s music-publishing businesses would be part of the combined company, according to a corporate press statement.

By pooling together their recording assets in a 50-50 venture, Sony and Bertelsmann would trim overhead costs and buffer their music divisions from slumping record sales, which have sunk to their lowest in over a decade.

“The industry is in a storm, and I don’t see any signs of it clearing next quarter or even next year,” Sony Music Chairman Andrew Lack told the Los Angeles Times. “The joint venture is a much better alternative than going forward on a stand-alone basis.”

The announcement represents the latest of consolidation talks among recording companies, as declining sales, distribution costs, and widespread piracy continue to erode the $31 billion global music industry.

“The industry is going through tremendous difficulties, and mergers are the only way to cut costs,” Julien Raffelsbauer, an analyst at Bank of America Corp., told Bloomberg news.

In fact, just as Sony and Bertelsmann announced their plans, competitors Time Warner Music and EMI Group reportedly entered the final stages of negotiating their own merger deal. Time Warner Music and EMI combined accounted for nearly 24 percent of the world’s music market share last year.

“They’ve got to cut down on their talent costs, their distribution costs, their overhead costs,” John Jordan, an industry analyst with Cap Gemini Ernst & Young, told the Boston Globe of the music industry consolidation.

“All these guys are losing money right now, and there’s been a lot of talk for months about who was going to buy who and how it was going to play out,” Jordan said.

The Sony BMG joint venture is not yet a done deal however. Any formal agreement remains subject to a number of conditions, including approvals of the regulatory agencies in the U.S. and the European Commission.

If the deal is approved, critics warn the merger could hurt artists and consumers alike.

Eleanor Fox, an antitrust expert at New York University, told the LA Times that if the recording industry shrinks from five to three major companies, it could make it “much easier for the companies to act in lock step and do what one another’s doing and raise prices.”

Others cautioned the merger would have a strong effect on performers and aspiring artists who will have only a few recording companies to market and distribute their music.

“The artists have got less choice in terms of places to go to,” Simon Renshaw, co-head of the artist management The Firm, said. Renshaw added that with fewer labels, musicians could be pressured to sign contracts with companies unwilling to allow artists control over their work, promotion, and income.

“You’ll have the control of the development and marketing channels in the hands of four or possibly three people,” Renshaw told The Los Angeles Times. “This is bad news for artists.”

While mergers in the music industry may relieve some financial burden in overhead costs, such deals are not likely stem losses from the illegal distribution of albums and downloading music from the Internet. The Recording Industry Association of America estimates the music industry loses $4.2 billion each year from “worldwide piracy.”

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