Music merger talk spins anew

Consolidation defends against shrinking market

News that AOL Time Warner and Bertelsmann are in talks to merge their record divisions — the latest in a torrent of rumors to hit the biz in recent months — drew a collective sigh of resignation from a war-weary music industry on Monday.

“Everybody’s talking, and everybody’s gonna continue to talk,” said one insider of the negotiations, reported in the Wall Street Journal. “We’re just sitting around waiting for the other shoe to drop at this point.”

This week’s reports follow similar speculation about talks between EMI and Warner Music, between BMG and Warner Music, between BMG and Sony Music and between Universal and any one of a half-dozen potential suitors.

And the first two deals are actually warmed-over versions of mergers that were attempted three years ago but failed to pass muster with European regulators.

Music execs reason that competition authorities will be kinder this time around, as the industry has been battered by tumbling sales and digital piracy — and regulators have since had their hands slapped by European courts for overly aggressive anti-competition rulings.

The latest would-be deal could create a label group that would top even market-leader Universal Music Group in size and scope, owning roughly a third of the global market and housing such acts as Madonna, Pink, Faith Hill and ‘N Sync.

Warner Music already is looking seriously at unloading its profitable CD and DVD manufacturing business. Warner distrib chief Jim Caparro is said to be in the late stages of negotiating a leveraged deal that would see him buy out the unit and use it as an anchor to create a centralized distribution and manufacturing hub for all five majors.

Whatever permutations eventually pass muster with shareholders and regulators, it seems all but inevitable to most insiders that the industry will consolidate to reap economies of scale and defend against a shrinking market.

Recorded music sales fell by nearly 10% in 2002, and the industry warns that online piracy could do still more damage in the coming year.

AOL Time Warner investors, long battered by the failed promise of the merger between old media and new, seemed cheered at the prospect of a deal with Bertelsmann Monday. AOL shares rose by 2.3% to close at $13.32.

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