Older and Wiser Music Firms Think It's Time to Settle Down:

Today's music companies are structuring smart deals that maximize benefits and please regulators.

Following the $10.5 billion-plus acquisidon of PolyGram NV by Universal Studios parent Seagram Co. in the late 1990s, the remaining top music rivals have been taking a spin on the dance with a partner here, a partner there, but no marriages have been consummated - until recently. After years of playing the field, they're now starting to settle down.

In late November, an investor group led by former Universal Music chief Edgar Bronfman Jr. agreed to buy the Warner Music Group unit of Time Warner Inc. for $2.6 billion - a deal announcement that came on the heels of EMI Group PLC's withdraw of its bid for the company.

A couple of weeks earlier, media and entertainment companies Bertelsmann AG and Sony Corp. cemented a deal to form a recorded music joint venture Sony BMG - which would combine the firms' recorded music businesses but not include their music publishing, distribution, and manufacturing assets.

Those years of courting appear to have done the companies good, though, industry followers say.

Many of the dead-end deals discussed during the courting years were scuttled even before they were announced publicly, sources say. Certain companies were very uneasy about sharing propriety technologies with a competitor, and sensitivity to the anticompetitive aspect of a merger or acquisition remains today. Many current deals specifically exclude aspects of the companies' supply chain - particularly manufacturing - from proposed JVs or mergers, says Bob Sell, a Partner at Accenture.

"I think what the companies have learned is that there are certain parts of their business that are ripe for rationalization of costs or rationalization of infrastructure. I also think many of them think they can, should, and will reconcile their label footprints. The identity and character of a label is less clear in the marketplace today, so that would typically mean it's appropriate to rationalize the numbers of them that we have," Sell says.

In addition, he states that music companies have "gotten smarter in that they don't just think of 'let's put the music publishing business and the recorded music business together and create a global footprint." "They're more strategic and more focused on which parts of their business should be brought together. They've learned through their courtships and are being very creative in how to structure deals, maximize deal benefits, and still attain corporate and regulatory approval."

Given how the music industry has changed in recent years and the music distribution challenges players face, experts think that regulatory authorities will be more amenable to deals today.

Ken August, a Managing Partner of Entertainment and New Media Consulting at Deloitte, says that because the industry has suffered from "disruptive" new technologies, like file-sharing, he thinks companies see an opportunity to better weather the storm as a larger company and gain substantial cost savings, at pricing that is "more or less right."

With few signs of optimism ahead for the beleaguered music business, the recently announced deals may indicate that companies are finally starting to seriously address the music sector's issues, experts say. The industry is in a state of chaos, they add, thanks to file sharing and the fact that consumers have shown a desire to own individual songs, not entire albums - a dynamic that shatters music companies' revenue projections.

However, the experts do not think that merging with or acquiring a competitor will be enough to solve the industry's deep-seated problems.

"These deals will not solve the digital dilemma or problems of relationships with artists," Sell notes. "Those are structural issues that will not be solved by m&a, and in some instances could exacerbate the challenges music companies face relative to artist relationships and music companies approaches to solving the digital dist challenge.

As Sell alludes to, industry consolidation could result in fractured relationships between music labels and artists. The newly merged firms likely will concentrate on gaining efficiencies, not on establishing better working conditions for the artists. "The deal synergies in these deals are in marketing and sales, not on the creative side," he says.

However, August points out that while gaining scale may be an inhibition to the creative side of the business, he thinks the industry can evolve "into something that's as good or better than what we have today." Creativity is already, to a degree, inhibited by the realities of industry economics, he adds, because the rising costs of marketing and touring, coupled with declining revenues, have narrowed the options of whom a distributor will throw its resources behind. "I think that as these larger entities become more secure, and if they're forward thinking enough, there may be a rejuvenation of creativity using the very technology that has put them in the position that they're in today in terms of inhibiting it." An example might be using the Internet creatively to discover new talent by having listeners react to and rank new artists, he adds.