Britney, meet Michael ( 2003-11-10 14:54) (Economist Magazine)
It
was always a question of who and when, not if. The five multinational music
companies—Universal Music, Sony Music, EMI, Warner Music and Bertelsmann Music
Group (BMG)—have been
engaged in a collective courtship ritual for years. Sales have been
declining—unit sales are down by more than a quarter since 1999—and, even after
swingeing cost cuts, industry insiders feel that they need to merge in order to
restore profitability. Hence the lack of surprise at the announcement that Sony
Music (home to artists like Michael Jackson and Beyoncé Knowles) and BMG
(Britney Spears) have said they wish to combine in a group that will have a 25%
share of the global recorded-music market and sales of ?.5 billion-5 billion
($5.1 billion-5.7 billion).
Two big questions hang over the deal. Will Sony and BMG manage to complete
the deal (which is so far just a letter of intent) before rival EMI persuades
Time Warner to sell it Warner Music (which is also being courted by a
private-equity consortium)? And, having got to the top of the queue, will the
Japanese-German combination get the go-ahead from the competition authorities?
After all, European Union regulators blocked two of EMI’s proposed deals—one
with Warner, the other with BMG—three years ago because they did not want to see
the five big music groups reduced to four.
The Recording Industry Association of America gives information on its
anti-piracy measures and its lawsuit against users of Grokster, Morpheus, KaZaA
and the like. The Electronic Frontier Foundation, a digital-freedom campaign
group, offers advice on avoiding the attentions of the RIAA's lawyers.
The music industry is in a dire state. The spread of piracy, both online and
offline, has led to a collapse in sales and profitability. The advent of compact
disc burners has made it simple and cheap to create high-quality pirate CDs—in
the past, the industry could point to the dodgy quality of tape-to-tape
recordings to deter customers. Even more worryingly for the industry, the
combination of the internet and file-swapping software means that computer users
can amass vast libraries of music for nothing. No wonder the record companies'
shipments of music have fallen by 26% since 1999 (though, thanks to price hikes,
revenues have fallen by a slightly less worrying 14%).
Music executives seem to have realised that they cannot continue to increase
prices forever, especially when their colleagues in the movie business (who have
also been plagued by piracy) are putting out DVDs, with extras like director
interviews, at prices that rival music CDs. In September, Universal, the world’s
biggest music company, cut the wholesale price of CDs to American stores, making
it possible for them to sell new music for as little as $10 and still make
money. At around the same time, the industry also issued lawsuits claiming
damages against hundreds of people who, it claimed, had illegally shared
copyrighted music over the internet.
The industry’s other response to the profit crunch has been the old-fashioned
one of slashing costs—over the past couple of years, the industry has cut almost
a fifth of its jobs worldwide. But there is a feeling that the music majors are
close to the limit of what they can achieve by cutting internal costs—hence the
incessant merger talk. In the first half of this year, Sony Music made a
negligible profit of $2m on sales of $1.14 billion; BMG had an operating loss of
?17m on sales of ? billion. The companies have said they could make combined
cost savings of $250m-300m if they merge, though theoretical savings often prove
elusive.
In any case, the deal may not go ahead. Many music insiders are sceptical
about just how advanced Sony's talks with BMG are—the companies admit that they
have yet to do their due diligence. Some think the announcement was a ploy to
jump ahead of EMI and Warner Music in the regulatory queue, rather than the
reflection of a done deal. So far, the European Commission has treated
applicants on a first-come, first-served basis, though there is no guarantee
that it will continue to do so.
Regulators on both sides of the Atlantic will take a lot of convincing,
whichever combination they scrutinise first. When the Europeans turned down the
EMI/BMG deal three years ago, they were persuaded by their doctrine of
“collective dominance” that the merger would hurt both consumers and large
chunks of the industry (including the independent labels, which between them
account for a quarter of recorded music sales). But things have changed since
then. For one thing, the collective-dominance doctrine has been weakened in the
EU’s own Court of First Instance. And music executives will argue that Universal
is already bigger than either Sony/BMG or EMI/Warner would be. They will also
remind competition officials that the prevalence of piracy has changed the rules
of the game. Still, there is no guarantee that the Big Five are about to become
the Big Four.
It
was always a question of who and when, not if. The five multinational music
companies—Universal Music, Sony Music, EMI, Warner Music and Bertelsmann Music
Group (BMG)—have been
engaged in a collective courtship ritual for years. Sales have been
declining—unit sales are down by more than a quarter since 1999—and, even after
swingeing cost cuts, industry insiders feel that they need to merge in order to
restore profitability. Hence the lack of surprise at the announcement that Sony
Music (home to artists like Michael Jackson and Beyoncé Knowles) and BMG
(Britney Spears) have said they wish to combine in a group that will have a 25%
share of the global recorded-music market and sales of ?.5 billion-5 billion
($5.1 billion-5.7 billion).
