Sony and Bertelsmann are to merge their music operations, creating a firm to rival Universal Music's 26% share of the global recording industry.
Justin Timberlake is one of BMG's key performers
Sony Music and BMG, the second and fifth-biggest record companies worldwide, signed a non-binding agreement to form a 50-50 joint venture, and are now pledged to work towards a final agreement later this year.
The deal pre-empts another expected merger, between Britain's EMI and US Warner Music - numbers three and four in the global charts.
According to press reports, EMI is now close to lining up funding for its purchase of Time Warner's music division.
Both deals reflect the increasing competition in the music business, which is suffering from slowing global demand and the effects of unofficial online music sales.
None of the big five music companies have yet formulated a decisive response to the challenge posed by the internet, which they blame for rampant piracy.
Sales of CDs and other traditional media for recorded music have been sluggish, something the industry again blames on cheap or free competition on the internet.
Until the middle of this year, it seemed that a link-up between Warner and BMG was the most likely outcome, but the two firms failed to agree terms.
Now, EMI's deal with Warner is still far from concluded.
Financing is reportedly in the pipeline, but not yet conclusively agreed.
Bertelsmann was long linked with Warner
And other groups are circling Warner, which has been put up for sale by its heavily indebted parent company.
Any merger among the big five firms will come in for scrutiny from the competition authorities.
Objections from European regulators torpedoed a previous attempt to merge EMI and Warner three years ago.