Bigger is Not Always Better- the Sony BMG Venture Ends in August 2008

The phrase “bigger is not always better” speaks to the failed Sony and Bertelsmann merger. The venture lasted four years instead of the scheduled five years.

Through its own music club concept and music label, Ariola, Bertelsmann entered the music industry in an unusual way: without M&As,. Bertelsmann combined all music businesses into Bertelsmann Music Group (BMG) in 1987. In 1986 it purchased the U.S. music label, RCA, and in 2000 it expanded into the online market by purchasing CDNow, the number one CD seller online and the then illegal Napster, resulting in a series of lawsuits (Sony BMG Facts and Figures). More financial troubles started when the Mohns imposed a strategy to buy out the shareholders and the outrageous price paid ($3 billion) for Zomba Records in 2002. Before the Sony-BMG venture, Sony expanded into new markets such as music and theatre, and it acquired CBS in 1998. Sony faced heavy losses after these M&As.

The joint-venture between Bertelsmann Music Group (BMG) and Sony Music Entertainment, owned by Sony in August 5, 2004 was a widely disputed merger by the media, smaller music companies and organizations such as Impala. Despite the criticisms such as “market imbalance”, “excessive concentration kills creativity, monopoly over the music market and monopoly over artists the European Union Commission approved it with the blink of an eye on July 19, 2008 (Honey Records, n.d.). The main reasons for this merger were to increase profits for Bertelsmann, and it was a life vest for Sony. Financial analysts anticipated that up to 2000 jobs could be cut as a result, saving Sony BMG approximately $350 million annually. Other reasons for the merger were the synergies among the different media divisions (cross-advertising, cross-collaboration, and cross-production). Sony also wanted to increase its market power after the weak performances in sales. These can be attributed to the weak consumer demand, increasing competition in the hardware markets (Sony’s core business) and the $3.2 billion loss in its music and movie divisions . The previously acquired theatres by Sony filed for bankruptcy in 2001 and 2002. Furthermore, Sony was the least diversified company on the market and could not compete against Apple’s iTunes alone. Another reason for Sony’s weakness could have been its corporate culture (Peltier, 2004) and the cultural differences between the markets in Japan and in the U.S. Sony is a Japanese company that had Japanese CEOs before the merger. Unlike at Bertelsmann, at Sony there were no collaborations between its electronics and content divisions (Roger, 2007). In order to compete on the market, Sony needed to attract investors, pump up its sales and adopt a decentralized organizational structure. Overall, for both companies this joint-venture meant less risk than a M&A, more diversification, increased flexibility and volume, and a stronger position on the global music market. Sony BMG was half-owned by the partners, Sony, of Japan and Bertelsmann, of Germany. The merger made Sony BMG the second largest record label behind Universal Music Group, owned by Vivendi (Chan-Olmsted & Chang, 2003, Honey Records, n.p).

In conclusion, the Sony and BMG merger created a more concentrated music market between 2004 and 2008. From a business point of view this merger was beneficial for Bertelsmann because despite internet piracy, its overall music sales picked up in 2005 (IFPI Digital Music Report, 2006). However, illegal downloading was hurting the overall music industry and therefore the two companies, too. Through this venture they tried to join forces to built a stronger, united front against illegal downloading, and cut costs by using the same facilities. The question is what will happen next with the music division at Sony and BMG, and what were the actual benefits of the merger. During the joint venture BMG and Sony faced problems such as copyright and illegal online music downloads. Cross-selling and cross-promotion in new markets such as cell phones and social websites are an ongoing. For instance, Nokia device buyers get a one year subscription to the Sony music catalogue this year. It remains to be seen if by creating other joint ventures with Warner and Universal on MySpace Sony BMG can compete with the online music giant, iTunes. The literature doesn’t mention the motives behind this transaction from the view of Sony and BMG.

Since the global music market is also constantly evolving and consumer behaviors are changing, there is no one-size-fits-all strategy. Since BMG has interests only in the European music market and Sony in the U.S. music industry each of them should consider the political, cultural and financial environment of these markets. Furthermore, the music divisions in both companies have to integrate consumer friendly technology in their products. Both BMG and Sony must focus more on the digital music market (online music downloads, online music subscription and music to mobile) because this market would give a huge advantage to smaller music firms that could not compete with either Sony or BMG on the traditional music market. Sony should ensure a deeper integration between its music and electronic products divisions and explore new markets such as India and China. Since peer-to-peer (P2P) may be used for legal distribution of music, both companies have to develop strategies to be leaders in these new music markets (mobile market, online music market, legal digital file sharing market). How can they overcome the challenges of the today’s music market where illegal and legal online file sharing still exist and where the coexistence of the CDs and the online music is still unsure- this remains to be seen.