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Last Updated: Wednesday, 19 November, 2003, 00:33 GMT
Mixing up the music industry
Clare Matheson
BBC News Online business reporter

Beyonce Knowles
Sony's Beyonce dominated singles and albums charts earlier this year
With EMI, Warner Music, Sony and Bertelsmann racing to get regulatory approval for their planned mergers - what will consolidation mean for the music industry?

Music companies are in a real spin - battling falling profits, increasing competition and rampant piracy.

A report by IFPI, which represents the music industry worldwide, estimated that in 2002 one in three discs sold was pirated, boosting the value of the global counterfeit music market to $4.6bn (2.7bn).

Physical piracy - illegally copied CDs - meant that in 2001, for the first time in many years, no album sold more than 10 million copies worldwide.

Killing music?

Pro-music, an international initiative to promote legitimate online music - added that internet uploads have soared as album sales have fallen.

In one four-month period in 2002, the number of music files available on pirate sites jumped from 500 million to 900 million.

Meanwhile, global music sales in 2002 fell by around 7% - resulting in 250 million fewer albums being sold in 2002 than in 2001, Pro-music said.

There is a race taking place with significant rewards for winning as the cost savings are absolutely vast in proportion to operating profits
SG Securities
Music is also now competing with a much wider range of activities for people's leisure time - DVDs, computer games, and the internet to name but a few.

Universal Music has tried to tackle its problems by slashing the price of CDs - at least in America.

But the other big four music names seem to think that joining forces is the way forward.

BMG spokesman Patrick Reilly said its tie-up with Sony would form a company that would "help us sustain and maintain or record labels".

Without the deal, he adds, the pair would face reduced investment.

Double act

Experts say the merger would also enable huge cost cuts to take place - potential savings could be made by merging Sony and BMG's manufacturing and distribution wings.

EMI believes it can save up to 300m a year if it teams up with Time Warner's music arm.

Simon Baker of SG Securities said: "There is a race taking place with significant rewards for winning as the cost savings are absolutely vast in proportion to operating profits.

Music market shares
The bigger issue is the market is set by big players. These deals may encourage them to exercise semi-monopolistic control in the marketplace
Martin Mills, Beggars Group
"But there is a regulatory risk and a risk that one or two companies may be left out."

Meanwhile, Frazer Mackenzie, head of the Department for Music & Entertainment Industry Management at Buckinghamshire Chilterns University College, believes a merger could help firms change their strategy.

They could change tactics to create a "brand" rather than a recording artist, and seek deals with internet portals, TV firms and other media outlets.

"I think exploring other income streams, beyond buying albums and tracks (whether on line or as physical product) may become equally attractive to the labels.

"Pop Idol is a great example of exploiting a 'brand' across a variety of platforms, that's why it's been so successful."

Musical chairs

While the mergers will "at least offset some margin pressure" for the firms, as Simon Baker argues, what will they mean for the rest of the industry?

Independent labels have already voiced fears that the creation of just three huge music majors would mean disaster for the industry.

Robbie Williams - EMI
Robbie's 80m EMI deal gave him merchandise and sponsorship cash
Martin Mills, chairman of Beggars Group says the plans are a present a real "danger for independent labels".

Artists, consumer choice and the market could all be affected, he says.

Mr Mills suggests that it is possible that the majors could "start to exercise corporate muscle" to grab cash from merchandising and sponsorship deals that have traditionally gone to the artists themselves.

He also adds: "The problem is the incompatibility between art and culture, and corporations."

Audio bullies?

Music firms could in fact aim for the "fast buck" and head down the Pop Idol route to sales, he says.

But Mr Mills added: "The bigger issue is the market is set by big players. These deals may encourage them to exercise semi-monopolistic control in the marketplace."

For example, he says that when Universal cut its CD prices in the US, the move was accompanied by a demand that retailers provide them with 32% of their shelf space.

Gareth Gates - BMG
A merger may mean a move toward "Pop Idol" style marketing

And the situation could be repeated, after a fashion, in the UK - as companies have to pay HMV for racking space at the front of their stores, Peter Quicke, head of Ninja Tunes explained.

He added: "Universal changed the whole market. As well as the US price cuts they also bought up all the advertising space on French music channel TF1 - blocking out all other labels."

"What will happen if companies are allowed to get bigger is they will start to control the market a little bit like a cartel."

Major changes?

But of most concern to Mr Quicke is the future of the business model for small labels, which he says, could be "very dark" as collecting societies - which pick up licence payments from TV, radio, advertising and other forms of airplay - could disappear.

"If the three majors decided not to pay these societies - then the MCPS, PRS and PPL may disappear.

"These societies work as most of the industry subscribes to them. But the majors may change and decide to collect themselves - and that change could engineer the collapse of those companies."

And if they do collapse, it means less money for artists and independent labels.

"The market must be regulated and this [merger] must not be allowed to happen," Mr Quicke added.

EMI posts dip in profits to 39m
19 Nov 03  |  Business
Universal buys Dreamworks Records
11 Nov 03  |  Business
Music giants join forces
06 Nov 03  |  Business
Sony plans massive job cuts
28 Oct 03  |  Business
EMI plots bid for Warner Music
22 Sep 03  |  Business
AOL Time Warner drops 'AOL'
18 Sep 03  |  Business
Sony profits plunge 98%
24 Jul 03  |  Business
EMI joins anti-Napster suit
05 Jun 03  |  Business
EMI shares hit by gloomy outlook
20 May 03  |  Business
Record industry warns 'online pirates'
30 Apr 03  |  Entertainment
Bertelsmann sued over Napster
21 Feb 03  |  Business

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