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Sony free to mix music, electronics

The Japanese giant moves to make the two divisions more complementary after a split with Bertelsmann.

October 14, 2008|Ryan Nakashima | The Associated Press

Now that Sony Corp. and Bertelsmann have broken off their troubled relationship, known as Sony BMG, the Japanese company hopes to harmonize its consumer electronics and its music, a duo that has been badly out of sync.

The music business combination four years ago made Sony BMG the world's No. 2 record label, generating savings and preempting other industry consolidation.

But the venture's cost-cutting didn't keep pace with falling CD sales, and the two companies' digital strategies didn't mesh.

So they called it quits and Sony bought out its partner for $900 million in a deal that closed Oct. 1.

Selling its 50% stake will let Bertelsmann refocus on its growing TV, magazine and book-publishing businesses.

Full ownership of the music venture, meanwhile, gives Sony control of a medium it can use to drive electronics sales, just as it is using wholly owned Sony Pictures to help sell the Bravia line of TVs. The new company is called Sony Music Entertainment Inc.

"It's nice to see Sony at least trying to line up some of their content efforts with their hardware," said Michael Gartenberg, vice president of global strategy for Jupiter Media. "Up until now, the left hand never seemed to know what the right hand was doing."

The music venture was so dissonant that it often helped Sony competitors.

In one case, Bertelsmann insisted the venture shop music videos to Microsoft Corp.'s Xbox 360 instead of Sony's PlayStation 3 gaming unit "to make sure it's a fair deal" for Bertelsmann, said a Sony executive who asked not to be identified because those negotiations were private.

As a result, PlayStation 3 customers have to do without music videos from Sony BMG.

In another case, Sony BMG was the last major record label to join the PlayNow Arena online music store from Sony Ericsson -- Sony's mobile phone venture. PlayNow launched in August in Scandinavia.

Sony BMG has been "by far the toughest agreement to get in place," said Victor Fredell, Sony Ericsson's content acquisition manager of music.

Fredell blamed the 50-50 ownership of Sony BMG, which meant neither company had a clear upper hand.

"They were just different in their approach to the business," said Jay Cooper, a music attorney whose clients include Sheryl Crow. "I think they managed to put together a strong company but unfortunately they had two different kinds of philosophies."

In contrast, Sony easily made "Hancock" from Sony Pictures available via the Internet for Bravia TVs for just $9.99 before the DVD release. The idea is that such exclusive offers -- this one includes a Blu-ray disc -- will boost sales of Bravias and the $299.99 Internet modules made by Sony Electronics.

Sony already this month has moved to streamline the music group, merging two labels that had been run separately by Bertelsmann and Sony.

Next, the Sony executive said, will be a push to better integrate Sony music with Sony Ericsson mobile phones, which had a paltry 8% market share in the second quarter.

Even Apple Inc. has yet to perfect the mobile phone music business: Its iPhones can't directly download iTunes music, for instance.

"This is their opportunity to find some way to challenge Apple in a space that they don't completely own yet," said Jupiter's Gartenberg.

Whether Sony can succeed is an open question.

Next Thursday, Nokia Corp. launches its much-heralded Comes With Music venture in Britain, a service for which a year of free downloads is included in the purchase of a phone. Prepaid models start at about $229.

Whether mobile music offerings gain traction depends a great deal on fickle consumer tastes -- for Nokia's all-you-can-eat system, or Sony's and others' pay-as-you-go regime.

"And then you have to assume that people want music on their phones," said Russ Crupnick, a digital music analyst for NPD Group. "I think the jury's still out on that."

Last year, the entire music market as measured by album and track sales shrank nearly 10%, and it is down about 5.4% so far this year.

All the labels -- including leader Universal Music Group, Sony, third-place Warner Music Group Corp. and EMI Group -- are making more music available cheaply on a wider array of platforms and devices in the hope that digital downloads will push the needle the other way again.

And that digital strategy matters more for Sony than for most, since it is close to slipping to No. 3.

Its share of the U.S. music market is now 22.8%, down from 28.5% in 2004, according to Nielsen SoundScan, while Warner's rose to 21.1% from 14.7%.

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