Sony Music and BMG

Sony Music Entertainment and Bertelsmann Music Group could soon be one.

On November 6, in the first of what may be several such consolidations in the music industry, the two giants announced their intention to merge. Should the deal win regulatory approval, the combined entity would be managed by two former television executives, with Sony's Andrew Lack serving as chief executive officer and BMG's Rolf Schmidt-Holz serving as chairman of the board of directors. Lack joined Sony Music last year after a long stint as an executive with NBC television. In his few months at the helm, Lack reportedly has saved Sony $150 million. Schmidt-Rolf has long experience as an executive with Bertelsmann's publishing and television divisions. The two are said to enjoy an amicable relationship.

The proposed deal, described in a joint statement as "a 50/50 merger of equals," would combine the two companies' recorded music businesses, including A&R, engineering, and marketing. The partners would have equal representation on the board of directors, but would maintain separate manufacturing, distribution, and publishing units. BMG's chief operating officer Michael Smellie would retain his position in the new company. Among the proposed entity's top three executives, Smellie is the only one with long experience in the music industry.

Other music industry mergers are under discussion, including an offer by DreamWorks to sell its music division to Universal Music Group, and a possible partnership between Time Warner's Warner Music Group and EMI Group PLC. BMG was also in discussions with Warner, but broke off negotiations just a few weeks before announcing the plan with Sony.

Sony's move follows several recently-announced corporate restructuring plans, including deep cutbacks in its global workforce and a reorganization of its North American sales-and-marketing team. On Tuesday, November 4, Sony executives in New York announced that the company would likely let go as many as 1700 workers from Sony Music and Sony Pictures Entertainment. The movie division has fared poorly over the past year, getting hammered at the box office with losers like Gigli and Charlie's Angels: Full Throttle.

A Sony-BMG merger faces an uncertain future with European Union regulators, who have blocked previous music industry mergers due to fears of creating monopolies. The music industry's ongoing malaise may make them consider the new proposal in a different light, but nothing is certain at this point. Sony Corporation vice president Howard Stringer told reporters that the EU's position is unclear.

Should the deal win approval, the combined entity would be roughly the size of the industry leader, Universal Music Group, with a global market share of about 25%, representing combined annual sales of around $5.7 billion. A Warner-EMI combo would have a similar share. Such consolidations are adaptations to an ever-shrinking market for recorded music, where sales have declined 26% since 1999. Major labels have cut their workforces by 20% in response, with further cutbacks likely. A Sony Music–BMG merger could save the partners $250 million to $300 million annually, according to Bertelsmann AG chief executive Gunter Thielen.

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