Sony-BMG tie up soon

The merged company will be a 50-50 joint venture and will reduce the number of music majors from five to four.

Sony Music's planned merger with the music arm of Germany's Bertelsmann is aimed at boosting up the electronics and entertainment conglomerate's music download business, analysts said Tuesday.

HT Image

The proposed merger, which will create the world's second largest music group after Universal Music, was approved by the European Commission earlier in the day.

"In Europe, Sony has a strong brand image. The merger should give Sony many music titles for digital downloading by individual consumers," said Osamu Hirose, an analyst at Tokai Tokyo Research Center.

"Sony has been streamlining its music business and the segment's earnings have been improving. As digital downloading of music becomes more and more common. Sony is aiming to offer a wider range of music content and song titles to consumers by merging with Bertelsmann," he said.

"With a wider range of music titles available under the Sony brand, I think Sony may be hoping to improve sales of its version of the iPod," Hirose said, comparing Sony's Network Walkman with Apple Computer's hugely popular portable digital music player.

In approving the merger the European Commission unconditionally concluded it "did not have sufficiently strong evidence to oppose the deal".

The merged company will be a 50-50 joint venture called Sony BMG and will result in a reduction of the number of music majors from five to four.

The proposed merger would bring together Sony stars such as Barbra Streisand and Beyonce with the likes of Elvis Presley and Christina Aguilera in the BMG catalogue.

Sony BMG will be headquartered in New York and bring together a series of record labels including Sony's Columbia and Epic, and BMG's Arista and RCA.

The deal may still face legal challenges from independent record labels which promised action if it was cleared on the grounds the merger would affect on-line services and have a bad impact on artists' contractual terms.

A Sony spokesman in Tokyo declined to comment on the European approval, noting that the planned merger has yet to clear reviews by the Federal Trade Commission (FTC) in the United States.

The European Commission said it had worked closely with the FTC in its review of the case.

According to press reports, the FTC will also clear the deal in the next few days.

Last year Sony announced a major turnaround plan aimed at strengthening the company by its 60th birthday in 2006 in the wake of the "Sony shock" of heavy losses in the January to March 2003 quarter.

The Sony spokesman said, however, the music segment accounted for only 559.9 billion yen (5.1 billion dollars) of the Sony group's 7.5 trillion yen sales in the year to March 2004.

By contrast Sony's electronics division generates about two thirds of the group's total revenue.

Sony Music Entertainment Japan Inc, which accounts for about 26 percent of Sony's global music business, would not be part of the merger, the spokesman said, adding that manufacturing plants and distribution networks for music CDs would also be excluded.

The merger is not likely to have a significant impact on Sony's overall earnings although it should not hurt the company, said Mitsuhiro Osawa, analyst at Mizuho Investors Securities.

"Sony has been focusing on sales of electronics hardware, such as DVD recorders. The merger in the music sector is not likely to have an immediate, significant impact on Sony's overall earnings. The music segment is only one of many segments that Sony is involved in," Osawa said.

"But it is significant in a sense that it shows Sony is not neglecting its content business. It probably makes sense not to do the (music business) alone so that they can benefit from economies of scale," he said.