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Sony, Bertelsmann Intend to Join Forces, Merge Music Businesses

By Ken Belson

The New York Times -- TOKYO

Two of the world’s entertainment giants, Sony of Japan and Bertelsmann of Germany, said Thursday that they were planning to merge their music businesses into a joint venture that would be the second-largest music company in the world.

The companies signed a nonbinding letter of intent to form Sony BMG, which would be 50 percent owned by each company. The two companies have been negotiating for several weeks. Sony BMG would be second only to Universal Music Group, a division of Vivendi of France.

The move comes as record companies worldwide try to find ways to offset the explosion in music available legally and illegally on the Internet. High production costs and competition from other forms of entertainment, including movies and video games, have also contributed to sliding music sales.

A Sony-Bertelsmann venture would likely face scrutiny from various governments, since only five record labels dominate the music business.

The venture with Bertelsmann’s BMG recording studio, if concluded, would be the latest step by Sony to overhaul its electronics and entertainment empire.

The Tokyo-based company, which has struggled to revamp its consumer electronics division, has also had to make extensive management changes at its music group, which has its headquarters in New York. In January, Sony appointed Andrew Lack as chairman and chief executive pf Sony Music Entertainment, replacing Thomas Mottola, a long-time executive who differed with Sony’s top management.

Lack is to become the chief executive of Sony BMG. Rolf Schmidt-Holtz, currently the chairman and chief executive of BMG, is to become the chairman of Sony BMG.

Lack helped rebuild NBC News, but had no previous experience in the music business. Soon after his appointment, Sony Music announced plans to eliminate 1,000 jobs in hopes of saving $100 million a year. Sony took a charge of 4.1 billion yen, or $37 million, in the July-September quarter to pay for the restructuring of its music business.

Sony’s music division, which has contracts with artists such as Aerosmith, Michael Jackson and Jennifer Lopez, has struggled for several years. Sony has also tried to reduce costs at its movie division.

In the July-September quarter, sales fell to 127 billion yen, 8.9 percent less than a year earlier. Thanks to cost-cutting measures, though, the group recorded a 300 million yen operating profit, compared with a 5.6 billion yen loss a year earlier.

Sony is not the only music business in trouble. In October, Universal said it would reduce its workforce by 11 percent. Last year, EMI Group cut 20 percent of its employees. Time Warner has considered merging with or selling its Warner Music business to EMI, and held combination discussions as well with BMG in the past.

BMG is the smallest of the world’s top five labels. It reported operating losses of 117 million euros, or $133.6 million, in the first half of the year, nearly triple its losses of a year ago. The company attributed the poor results to a combination of delayed album releases, writeoffs of record contracts with Whitney Houston and other stars, and piracy.

Sales of recorded music have fallen in the last three years as more consumers download music from the Internet. Sony, in particular, has been hurt by this trend because it not only produces music, but also makes the recorders, stereos and other devices to listen to it.