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A crash course in divergent harmony

WMG, BMG must dance around differences

There are few bright notes in the music biz: Album sales are plummeting (down 9% year-to-date), digital pirates are thriving and along with an unfortunate recession, there’s a dearth of new talent capable of proping up the industry the way the Backstreet Boys, ‘N Sync and the Beatles did justa few years ago.

But percolating in the backrooms of two media congloms is a deal that could represent a tectonic power shift in relationships with artists, retailers and pirates. Warner Music and Bertelsmann Music Group (BMG) are in deliberations to create the second largest recorded music company in the world after Universal Music Group, a new entity with combined sales of $5.7 billion.

There are, however, no guarantees that Euro trustbusters will OK the deal, even in such dire financial times for record companies and even though the companies propose to leave their music publishing arms out of the deal.

The proposed merger is mostly about cost-savings. The two sides must still resolve issues of valuation and control — Warner Music is 20% bigger than BMG and Warner chief Roger Ames is widely tipped as the likely CEO.

The marriage is a desperate measure, to be sure. The industry is facing a piracy-fueled endemic worldwide decline (one out of every three CDs was pirated in 2002) far more destructive than any cyclical recession.

Scale may not keep the digital anarchy at bay, but it could help keep the wolf from the door. Both parties insist talent and labels would be spared any major cost-cutting.

But can the combined brain and muscle of two companies find a way back to growth?

Indeed, the inspiration to get hitched is more practical than passionate:

Cost Savings: Consolidation of back office functions should drive savings of $400 million annually. It would also boost operating margins at Warner to 15% from 7% — on par with Universal Music Group.

BMG head Rolf Schmidt-Holz has already cut huge swaths off his company’s ops in the last year. WMG parent AOL Time Warner is selling off non-core assets and tightening its belt in others.

Clout: A combined BMG and WMG should gain leverage in negotiations with talent and power retailers like Wal-Mart.

Culture: The two companies have distinct creative cultures. Under a single roof, the combined entities could become a test lab of multiple business models for creating hit records and developing talent — or they could devolve into a management nightmare.

Historically, the labels within WMG and BMG racked up hits by following different paths. And even with changes in the executive suites, there has long been a carryover effect from the labels’ heydays.

An example: Warners signed and held onto the Grateful Dead because of the cachet it gave the label with rock acts of the late ’60s and early ’70s; BMG’s Arista Records signed the Dead in the mid-’70s with the plan to generate albums and singles. Both labels succeeded.

With the exception of RCA, BMG’s labels have specialized in acts with up-to-the-minute styles and have profited nicely from the boy band explosion and from R&B singers.

Clive Davis, who runs the J/RCA operation, is one of the last record mavens who believes in promoting singles in addition to albums, which can be a costly way to get an artist or a song known.

The top labels in the BMG family — Jive, Arista, RCA, J — were formed by established executive and musical talent with an eye toward creating hits.

WMG has a history of being committed to artist development.

Warners’ diskery was a seat-of-the-pants operation that grew via mergers with the former R&B label Atlantic (founded by two immigrant brothers) and Jac Holzman’s folk-and-classical imprint, Elektra.

One of Warners’ biggest signings in recent years was R.E.M., an act inked as much for its potential revenue production as its ability to bring credibility to the label.

When Warners stole Tom Whalley from Interscope late last year, the intention was to invigorate its roster of contempo artists that had the potential to make records for many years to come.

The two diskeries have also had vastly different approaches to catalog.

Warners Strategic Marketing, created after the label wholly purchased reissue masters Rhino Records, is an industry leader that has been aggressively mining the WEA vaults.

BMG, which has found more ways to reissue Elvis Presley records than most thought humanly possible, has been slow to get into the reissue game, having started a dedicated division only a year ago.

Universal, when it incorporated Polygram’s labels, created like-minded groups that were determined by musical styles and geography.

It’s highly unlikely a marriage of WMG and BMG m.o.’s would work unless the labels from one side were to give up their identity and style.

The BMG camp has been way ahead of the curve of late, with Dave Matthews Band, Backstreet Boys, ‘N Sync and Avril Lavigne carving niche paths that have led quickly to breakout success.

Warners, on the other hand, hasn’t broken a similar-type act since Alanis Morissette in the mid-’90s. Atlantic has had a similar drought: Its last act to hit the stratosphere was Hootie and the Blowfish.