EMI, Bertelsmann talk about music combination

EMI Group, which recently dropped a plan to merge with Time Warner’s music unit, said Germany’s Bertelsmann wants to combine its music division with EMI without buying the company.

The combination, which would bring together artists such as the Spice Girls and Santana, hasn’t been discussed in detail, EMI said in a statement released on the London stock exchange. EMI Recorded Music and Bertelsmann’s BMG Entertainment, both among the Big Five record labels, are seeking ways to share costs and sell more music online.

Two weeks ago, Bertelsmann formed an alliance with Napster to convert the free song-sharing Web site into a subscription service. “Anything that creates scale in the music industry is a good thing,” said Bridie Barrett, an analyst at HSBC Securities. EMI spokeswoman Amanda Conroy declined to comment. “We haven’t had any detailed discussions yet,” said Bertelsmann spokesman Oliver Herrgesell. He wouldn’t comment further.

EMI and Time Warner, which is being acquired by America Online, called off their merger last month after European regulators expressed concern they would dominate music sales on the Internet. Sales of recorded music are forecast to reach $42.8 billion in 2004 from $36.6 billion this year, according to a PricewaterhouseCoopers study.

In the United States, five percent of music sold in 2004 will be in electronic format rather than on a cassette or CD, the study forecast. HSBC’s Barrett said a combination of EMI and Bertelsmann’s BMG wouldn’t have as much market power in music publishing as EMI and Warner Music Group would have.

The two companies could also agree to sell some record labels if necessary to appease regulators. EMI is still open to reaching an agreement with Time Warner, people familiar with EMI said. “We are continuing to explore ways to structure a combination that will make sense to the two companies and be acceptable to the European Commission,” said Scott Miller, a Time Warner spokesman.

The same music groups that lobbied against the EMI-Time Warner agreement could also oppose a Bertelsmann purchase. “EMI-Bertelsmann raises the same concerns as EMI-Time Warner because it would result in industry concentration, with the resulting marginalization of smaller players,” said Philippe Kern, Secretary General of the Independent Music Companies Association (IMPALA) in Brussels, an organization of more than 600 independent music companies in the United States and Europe. “There are also Internet concerns because Bertelsmann is a major Internet player.”

Amelia Torres, spokeswoman for European Competition Commissioner Mario Monti, declined to comment on a possible combination of BMG and EMI. She said the commission had received “no new notification” from Time Warner or EMI.

A merger of EMI and BMG might pose less of a threat to rivals in the music industry because it wouldn’t have a link with AOL, analysts said. “My initial reaction is it’s a good thing for EMI...The two companies are fairly complementary,” Barrett said. Earlier last week, Bertelsmann said Michael Dornemann and Strauss Zelnick, the chairman and chief executive of BMG, will quit next year.

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