By Clare Matheson
Business reporter, BBC News
Indie artists the Arctic Monkeys were one of the biggest sellers of 2006
EMI may have agreed to a private equity takeover deal, but the battle for the music group may be far from over.
Long-time suitor Warner may return with a higher bid or a new name could even enter the fray, say analysts.
But the fact that EMI's board has given its backing to a £3.2bn ($6.3bn) bid from Terra Firma has been welcomed by the market.
Investors are snapping up EMI shares, driving its price higher, in the hope that a bidding war may break out - especially as recent reports suggested that EMI opened its books to three potential bidders in recent weeks.
And while experts predict rival Warner will return with a higher bid, they also welcome the fact that there is now an official offer price on the table after months of speculation.
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"It's the beginning, not the end," says Soleil Media Metrics analyst Laura Martin.
"We think it's a good thing for Warner, because it gives them a clear price for them now to beat."
A tie-up between the two music firms is also the only merger that makes financial sense to many experts, since a private equity deal will lack the same degree of overlap - and thus the same levels of cost cuttings.
"To be honest, Warner Music seems to be the most obvious buyer, the one that makes the most economic sense," says Ewan Stirling, investment director of UK equities at Standard Life Investments.
EMI, however, is likely to use the threat of "regulatory concerns" to try to see off any bid from Warner.
Terra Firma's offer, it has declared, is "the most attractive proposal received and delivers cash now, without regulatory uncertainty".
But in recent months, Warner has tried to beat this argument by "breaking ranks" and agreeing a deal with independent labels on the proposed ground-rules for a merger.
The agreement with Impala - a trade group representing Europe's independent record labels - aims to get rid of some regulatory hurdles that could scupper any takeover.
Independent labels warn that consolidation means less competition, less access to retail space and less choice for consumers.
And Impala is clearly a force to be reckoned with.
Its objections to the Sony-BMG merger - agreed in 2004 - mean that the European Commission (EC) is now reconsidering its authorisation of the deal.
The group also forced the EC to examine a deal between Universal and BMG Music's publishing arms, which led to Universal being forced to sell off the rights to some of its music catalogues.
Impala was set up in 2000 in response to the original efforts of EMI and Warner to join forces, at the time on EMI's terms.
The group put together a "wish-list" of how major mergers should be carried out - a set of guidelines it still sticks to today.
"A strategy was agreed that all mergers between majors should be prohibited without significant remedies to ameliorate the problems caused," explains Impala deputy secretary general Helen Smith.
"There is no difference between the EMI-Warner deal or the Sony-BMG deal," she adds. "The only difference is that Warner has broken ranks and agreed a deal with Impala that goes much further than our original wish-list."
Doing the deal
Warner's agreement with Impala means artists from the two majors would be sold off to smaller labels to "enhance" the market position of the smaller labels.
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It would also give independents greater access to get their products on shelves in supermarkets and stores.
Impala president Patrick Zelnick said members would now get first refusal on any of the combined group's subsidiary labels and their artists.
Warner has also agreed to help fund a new licensing initiative - Merlin - which would give smaller labels greater access to talks with software, media and online players such as Apple and Microsoft.
Merlin, which represents hundreds of small indie labels worldwide that have struggled to strike deals with major music websites because of their size, would effectively become a "major" label in the digital music world.
Digital downloads and web access to independent music have transformed the landscape of the British charts over the past year.
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"Competition is vital," says Alison Wenham, of the Association of Independent Music (Aim). She believes that smaller labels play an important role as innovators in the trends and bands that come to the fore - a role that "benefits the whole market, not just indies".
Others argue that although the industry is relatively young - recorded music has been around for just half a century - recent years have seen a massive concentration of power. About 15 years ago there would have been 15 companies of significant size, they say, with the largest only half the size of today's smallest major.
"It's interesting that big indies - like Beggars Banquet - say none of them could have got where they are today if they set up now, as the barriers and growth in music are so high and the gap between majors and indies is too large to be able to bridge," says Impala's Helen Smith.
She believes that if consolidation continues, companies will be firmly focused on the money and not the music - and that means even less artist development and a lot more "one-hit wonders".
"Majors tend to be market-led, very short-term vision," Ms Smith says. "Indies tend to be owner managed so they take a long-term, sustainable approach they need to invest in artists that will have a career."
However, industry analyst Jojo Gould believes the public would not even notice the change.
"The public won't realise the difference, when they go into a shop they don't care," he says.
"I don't think it will mean less throughput of new music either. Indies act as A&Rs (talent scouts) to majors so indie groups will still move onto major labels.
"If you're good, somebody will sign you up, and you will move on."