Sony, BMG reportedly plan merger of music businesses

Joint venture viewed as a way to bolster 2 droopy operations

November 07, 2003|By NEW YORK TIMES NEWS SERVICE

TOKYO - Two of the world's entertainment giants, Sony Corp. of Japan and Bertelsmann AG of Germany, have made tentative plans to merge their music businesses into a joint venture to bolster their flagging operations.

The companies signed a nonbinding letter of intent, an executive familiar with the deal said yesterday, indicating that the merger is not final. The two companies have been negotiating for several weeks, others said.

Record companies worldwide are trying to find ways to offset the explosion in music available legally and illegally on the Internet. High production costs and competition from other forms of entertainment, including movies and video games, have also contributed to sliding music sales.

A Sony-Bertelsmann venture, which would be called Sony BMG, would probably face scrutiny from various governments, since the music business is dominated by just five record labels.

The venture with Bertelsmann's BMG recording studio, if concluded, would be the latest step by Sony to overhaul its electronics and entertainment empire.

Sony, which has struggled to revamp its consumer electronics division, also has had to make extensive management changes at its music group, which has its headquarters in New York. In January, Sony named Andrew Lack chairman and chief executive officer of Sony Music Entertainment, replacing Tommy Mottola, a longtime executive who differed with Sony's top management.

Lack helped rebuild NBC News but had no previous experience in the music business. Soon after his appointment, Sony Music announced plans to eliminate 1,000 jobs in hopes of saving $100 million a year. Sony took a charge of 4.1 billion yen, or $37 million, in the July-September quarter to pay for the restructuring of its music business.

Sony's music division, which has contracts with artists such as Aerosmith, Michael Jackson and Jennifer Lopez, has struggled for several years. Sony has also tried to reduce costs at its movie division.

In the July-September quarter, sales fell to 127 billion yen, 8.9 percent less than a year earlier. Because of cost-cutting measures, the group recorded a 300 million yen operating profit, compared with a 5.6 billion yen loss a year earlier.

Sony is not the only music business in trouble. Last month, Universal Music Group, the world's largest music company and a division of Vivendi of France, said it would reduce its work force by 11 percent. Last year, EMI Group cut 20 percent of its employees. Time Warner has considered merging with or selling its Warner Music business to EMI, and in the past has held combination discussions with BMG as well.

BMG is the smallest of the world's top five labels. It reported operating losses of 117 million euros for the first half of the year, nearly triple its losses of a year earlier. The company attributed the poor results to delayed album releases, write-offs of record contracts with Whitney Houston and other stars, and piracy.

Sales of recorded music have fallen in the past three years as more consumers download music from the Internet. Sony, in particular, has been hurt by this trend because it not only produces music, but also makes the recorders, stereos and other devices for listening to it.

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