New York - The great consolidation race in the global music industry is on.
Pressure is mounting for the big five labels to become the big three in the wake of a deal between Sony and Bertelsmann that would turn their recorded music businesses into a 50-50 joint venture.
"This is the only way to survive in the creative recording business," says Rolf Schmidt-Holtz, the chairman and chief executive of BMG, a unit of German media firm Bertelsmann.
The new structure will mean lay-offs at both entities. Details will be decided "over the next months", Schmidt-Holtz says.
The Sony and Bertelsmann non-binding pact comes as EMI is gearing up to make a reported $1.6 billion cash and stock offer for Time Warner's Warner Music Group (WMG).
But regulatory approval and control and valuation issues remain hurdles to any unions between the world's largest music companies, analysts and label executives say.
EMI, Time Warner and Sony officials declined to comment, while others offered varied reactions to the pending deal.
Jim Guerinot, the manager of Columbia act The Offspring, is unsure of what the long-term impact of the merger will be, but in the short term he says it will most likely be "business as usual".
Terry McBride, the chief executive of Nettwerk Management, whose clients include Arista/ BMG recording artists Dido, Avril Lavigne and Sarah McLachlan, says:
"I've seen the memos from Sony and BMG and I don't think they tell the whole story."
"Of course Sony and BMG are going to say they're not going to make big changes, but I have a hard time believing that."
David Dreier, the chairman of the US house of representatives rules committee, says "bringing the creative cores of BMG and Sony together in a stronger music business appears to be a sensible response" to the industry's challenges.
Bertelsmann chairman and chief executive Gunter Thielen says the focus remains on the music.
"We have always maintained our commitment to music, even in difficult times."
"Over the past two years, BMG underwent restructuring and a very successful realignment to focus on the heart of its business: the creation of music."
On a combined basis, the proposed Sony BMG would have 25 percent global market share and 28 percent US market share. A merged EMI-WMG would have an estimated 24 percent market share both globally and in the US.
But the disclosure of two likely merger deals complicates the regulatory landscape. US and European Union (EU) regulators would have to approve the merger of Sony BMG and, theoretically, EMI and WMG.
Antitrust hawks in the EU have been loath to greenlight previous consolidation attempts. Since 2000, they have scuttled deals between EMI and WMG, and between EMI and BMG.
Their concerns have centred on the number of players in the industry as much as issues about market share. As a result, some analysts doubt that more than one merger will get past regulators.
"I don't know how two deals will get through," says Sanford C Bernstein & Co analyst Michael Nathanson.
In that respect, some see the Sony and Bertelsmann announcement as a move to beat EMI and Time Warner to the punch by getting to the regulators first.
Analysts expect news of a Sony BMG combination to put the other potential deal in the fast lane. EMI has lined up close to $1 billion in debt financing from a consortium of banks for the cash portion of the offer, sources say.
"I think EMI/Warner gets done real soon because of the BMG/Sony announcement," Nathanson says.
Unlike some previous music merger proposals that have gone before regulators, the venture between Sony and BMG, and the potential deal between Warner and EMI, would include only their recorded music businesses.
The joint venture between Sony and BMG excludes music publishing and manufacturing/ distribution. WMG's manufacturing and distribution have already been sold to Cinram, and the company is said to be shopping its publishing unit, so neither are likely to complicate a deal.
Also, a private equity play for WMG would have a better chance in clearing regulatory approval, analysts suggest.
An investor group comprising Vivendi Universal vice-chairman Edgar Bronfman, billionaire media investor Haim Saban and private equity groups, including Thomas Lee, are also talking to Time Warner.
Time Warner is likely to retain a minority interest in the range of 20 percent to 30 percent in the merged companies, with EMI owning the remainder.
EMI chairman Eric Nicoli and Jeff Bewkes, the chairman of Time Warner's entertainment and network division, are believed to have held meetings last Thursday about the proposed merger.
Meanwhile, EU competition authorities in Brussels have already been contacted, Schmidt-Holtz says. He does not expect a final decision on the merger for some months.
BMG chief operating officer Michael Smellie says he is unsure how regulators will react.
"It's certainly not a slam dunk."
But BMG executives maintain that the deal fits the context of the business climate.
Bertelsmann's Thielen expects Sony/BMG to generate annual revenue of $5.73 billion at current values.
Schmidt-Holtz will serve as chairman of the board of the new joint venture. Andrew Lack, the chairman and chief executive of Sony Music Entertainment, will be chief executive.