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Music merger to create new giant label

Showing signs of a music business struggling to adapt to new digital realities, Sony Music and the Bertelsmann Music Group agree to create a new joint venture.

Showing signs of a music business struggling to adapt to new digital realities, Sony Music and the Bertelsmann Music Group agreed Thursday to create a new joint venture, merging the second- and fifth-largest record labels into a single entity.

The deal comes amid reports that EMI Group has secured funds to bid for Warner Music. If both deals were to go through, just three entities would control close to 80 percent of the music sold in the United States, and they would dominate most other major music markets.

While many factors have pushed the music business into corporate marriages, analysts said the inexorable transition to a digital future has helped speed the process.

"Music's not going away, but the transition has just started from physical to digital distribution," said Michael McGuire, an analyst at GartnerG2, a division of the Gartner research company. "Corporate parents, who have a lot of very anxious investors, are looking at things that might be a drag on the bottom line, and that transition isn't going to be easy."

All the major music companies have been struggling financially in recent years, with revenue falling consistently since 2000. Executives have blamed much of the losses on digital piracy, whether from file-swapping services or CD copying.

Other analysts also point to factors such as the faltering economy and new competition from alternative entertainment sources such as DVDs and video games.

Sony and Bertelsmann issued a statement Thursday that said they had signed a nonbinding letter of intent to create a jointly owned record company called Sony BMG. Each parent would own half of the new venture, they said.

Rolf Schmidt-Holtz, currently chief executive officer of the Bertelsmann Music Group (BMG), would serve as chairman of the new company, while Sony Music CEO Andrew Lack would serve as its CEO. The board of directors would be drawn equally from each parent company.

The new venture would not include the parent companies' manufacturing, distribution or music-publishing businesses, areas that have served as special points of concern for antitrust regulators in previous music merger bids, the companies said.

The deal still must be approved by regulators in the United States and the European Union.

Sony-owned music labels represent artists such as Aerosmith, Tori Amos and Bruce Springsteen. BMG artists include Norah Jones, Elvis Presley, Beyonce and Lenny Kravitz.

Sony and BMG have had different strategies in dealing with online music.

Sony's strategy has been particularly murky, torn by the potentially conflicting goals of its consumer electronics, computer and content businesses. The result has often been content-protected music or music devices with content protection technology built in--neither of which has proved popular with consumers over time.

Sony has announced plans to create its own online music store, similar to Apple Computer's iTunes but likely tied closely to Sony hardware.

Over the objections of BMG executives, parent company Bertelsmann was for a time the only major-label backer of the original Napster, but that support wasn't enough to save the start-up. Current executives at BMG and its parent company have been more conservative, following the broader trend of licensing their music to online services such as iTunes and RealNetworks' Rhapsody.

If both major mergers go through, they would leave Universal Music Group--currently the largest of the major music labels--as the only music giant without a new deal. However, its parent company, Vivendi Universal, has reportedly been looking for buyers as well.

No financial details on the Sony-BMG transaction were available.