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Sources: EMI talks to rivals about giving up U.S. distribution

Company has fallen on hard times and the discussions about giving up its U.S. distribution may be another sign that physical distribution is giving way to digital.

UPDATE 5:15 p.m. In a move that underscores the waning significance of CDs, the EMI Group has spoken to the other three major music labels about taking over the company's U.S. music distribution, according to two industry sources.

EMI, which represents artists such as The Beatles and Coldplay and makes up about 8.2 percent of U.S. album sales, is looking to outsource distribution to one of its three larger competitors: Universal Music Group, Sony Music, or Warner Music Group, according to two sources familiar with the talks. EMI's representatives met with one of the labels as recently as this week.

The two sources disagreed on whether EMI is considering whether to give up digital distribution. One of the sources said that it's not unusual in the current economic climate for all the top labels to discuss outsourcing the "non-core" part of their businesses. According to this source, EMI is discussing only the physical "pick, pack, and ship" part of its distribution and the plan doesn't include sales or marketing functions.

A spokeswoman for EMI declined to comment.

That EMI is even considering a plan to turn over U.S. distribution to its main rivals is likely a result of the label's precarious financial situation and also an indication of how physical distribution is losing significance in the digital age.

EMI reported last week that the company's losses more than doubled in the year since Terra Firma, a European private equity firm, acquired the U.K.-based music label. The company also badly missed its targets for digital revenues. It forecast 51 percent growth but achieved only 29 percent.

Doing away with U.S. distribution could mean huge savings for EMI, said one source. It also could mean a loss of prestige as well as control.

Music distribution is a broad term and means everything from trucking CDs to retailers to deciding which acts to feature in advertisements at Wal-Mart. Historically, each of the majors has paid big sales and marketing staffs to help with these chores.

Most revenue generated by the top labels still comes from CD sales but they've been in decline for years, ever since the digital revolution began going mainstream. With CD sales in decline and with record stores disappearing around the country, the big music companies may be questioning the efficiency of operating their own distribution units.

All four majors have outsourced some parts of their businesses in recent years. For example, each has stopped pressing its own CDs.

But operating a U.S. distribution system is what major labels do. This is one of their main links to retailers, and by extension, to the public. It plays a part in how music is showcased in stores. Does EMI--should it give up its U.S. music distribution--become in effect just a large independent label?