Time Warner, EMI team to create music powerhouse

EMI shareholders will receive a cash payment of $1.65 per share, totaling about $1.3 billion.

Today's deal, which comes on the heels of the proposed megamerger between online giant America Online and Time Warner, is likely to establish a music giant on the Net as the business of offering digital downloadable music online blossoms.

"When AOL and Time Warner launch their music initiative, they will have about 35 percent of American recorded music at their disposal," Jupiter Communications analyst Aram Sinnreich said. "That will probably be enough to draw enough customers to really begin to change the way people consume music online, or consume music in general."

The proposed company--to be called Warner EMI Music--will have some of the biggest names on its roster of artists. EMI's catalog includes The Beatles, Spice Girls and The Rolling Stones, while Time Warner's list of artists includes Madonna, Phil Collins and Jewel.

"The earliest uses of electronic commerce…have been through the sale of music," Time Warner chief executive Gerald Levin said. "(We) have an opportunity…probably unequaled in the history of the music business, and (it) should accelerate the industry's growth far more than the CD revolution."

Analysts noted that EMI is the only major record label of the "Big Five" record companies--Warner Music, Sony Music, Universal Music, BMG and EMI--not associated with a larger, consolidated media player.

"It is impossible to succeed these days unless you have a very strong cross-media strategy," Sinnreich said. "This is the last nail in the coffin for an independent, major record company."

Yet analysts said some major regulatory concerns may arise, given the amount of content AOL will control after it completes its merger with Time Warner.

"Any other contender in the online distribution space is going to need some serious offline promotional power to compete effectively against whatever AOL-Time Warner decides to do with their music holdings," Sinnreich said. "We have already begun to see the smaller independents scrambling to lock strategic relationships."

Yet executives downplayed the regulatory issue. "We feel we have a compelling case for approval," EMI executive chairman Eric Nicoli said. "We are optimistic but it would be inappropriate to speculate on potential obstacles or indeed, potential solutions to obstacles that haven't risen yet."

Sinnreich said more deals in the music industry are likely. Recently, EMusic.com acquired Tunes.com, grabbing Tunes.com's exclusive rights to music magazine Rolling Stone and other content.

With widespread delivery of digital downloadable music looming, today's deal positions AOL, Time Warner and EMI to substantially profit from opportunities to bring music to target buyers over the Internet.

AOL, the world's biggest online services company, acquired Time Warner earlier this month for about $165 billion in stock, hoping to put Time Warner's extensive content before the eyes of its more than 20 million subscribers.

Warner Music and EMI said industry forecasts show that nearly 10 percent of worldwide music sales will happen over the Internet by 2004.

Forrester Research predicts that by 2003, downloadable music will be a $1.1 billion industry.

"The timing of this agreement could not be better as our industry embraces the digital revolution," said Eric Nicoli, chairman of EMI Group and co-chairman of the new global joint venture.

Time Warner and EMI will combine their music units to create a global, 50-50 joint venture. The terms of the deal include a $90 million termination fee if the deal is rescinded by either party.

The companies said Warner EMI's pro forma revenue for the fiscal year was about $8 billion. The merged companies expect annual cost savings of about $400 million by the end of the third full year after the completion of the merger.

Both companies have been active participants in the Secure Digital Music Initiative (SDMI), which is developing standards to prevent music piracy, especially on the Internet.

Some of the largest record companies have been trying to safeguard intellectual property but also profit from the expected explosion in downloadable music. Separately, AOL, as part of the Digital Media Association, has been fighting the Recording Industry Association of America (RIAA) over royalty payments and other issues concerning Net radio streaming.

"Warner is going to have a parent in AOL that clearly has the Internet in its DNA, and I think AOL will take a much more Internet-centric viewpoint on these matters," Raymond James analyst Phil Leigh said.

"Key members of the RIAA and SDMI--specifically Warner and EMI--will come to much more liberal thinking now about licensing issues as they relate to the Internet," Leigh said.

EMI already has relationships with several new media companies--either by taking equity stakes in exchange for content licensing agreements or by making direct investments. EMI has relationships with Preview Systems, Liquid Audio, Musicmaker.com, Digital On-Demand and Sanity.com. EMI also holds an equity stake in Launch Media, a company that streams music videos.

Warner EMI will also benefit from the marketing power of AOL's brand name and the possibilities for Net music over broadband networks, owned by Time Warner.

The joint venture will also benefit from the merger between Time Warner's Columbia House and CDNow.

Under the deal, Time Warner will have control of the board of directors of Warner EMI with six seats, and EMI will hold five seats. Richard Parsons, president of Time Warner, and Eric Nicoli, chairman of EMI Group, will serve as co-chairmen of the Warner EMI Music board.

Roger Ames, chairman and chief executive of Warner Music, will be the chief executive officer of Warner EMI, and Ken Berry, CEO of EMI Recorded Music, will be chief operating officer of the merged company.

Warner EMI Music will be headquartered in New York, with its non-U.S. operations based in London. Currently, EMI has 10,500 employees worldwide and Warner Music has 12,000 employees worldwide.

The company expects to cut some 3,000 jobs over the next three years.