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The same old tune

July 20, 2006

EUROPEAN REGULATORS ARE reconsidering their unconditional approval of the 2004 merger of Sony Music Entertainment and Bertelsmann Music Group. But opponents of the deal have a weaker case now than they did two years ago, and that's not just because Sony BMG Music Entertainment has proved to be something less than the sum of its parts.

The review was forced by the European Court of First Instance, which rebuked the European Commission for not providing enough evidence to support its initial approval of the merger. The court's ruling had a familiar ring: It was the fourth time in recent years that the court has overruled the commission's decision on a headline-grabbing merger.

Still, the independent record companies that challenged the merger seem to be looking at the industry through a rear-view mirror. The revolution unleashed by the Internet, MP3 files and other digital technologies is changing how labels and artists succeed in the music business, even if it hasn't yet loosened the major labels' hold on the Top 40.

The indies argue that reducing their ranks only makes it easier for the major record companies to dominate the shelf space in record stores, collude on prices and overwhelm competitors with huge marketing campaigns. It's true that the major companies sell far more units, collectively, than the thousands of labels that make up the independent music scene. But the world of CDs, big-box retailers and radio stations that drive sales is being undermined by technology, to the advantage of any artist or company nimble enough to take advantage of the new opportunities.

First, the barriers to entering the music business and building an audience have all but evaporated, thanks to low-cost ways to produce, promote and distribute songs. At the same time, a host of new, decentralized tastemakers and act breakers are emerging online. Second, the music market is slowly shifting away from packaged goods like CDs to digital ones, most notably downloadable singles. This demand for singles, in turn, favors the indies' approach, in which overhead is low and upfront investment small. Third, technology is increasing the pace of change. This doesn't favor bureaucratic conglomerates.

Sony BMG certainly hasn't looked like a behemoth since the merger. Its market share dropped sharply amid management turmoil, and it has reported losses in five of the seven quarters since the merger. So it's not as if the indies are being overrun by the ever-shrinking cabal of major labels. Instead, technology is overrunning the industry's time-worn business models.

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