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Tammie Arroyo/AP
Sony CEO Sir Howard Stringer

Will Sony’s $900 Million Bet on the Music Industry Pay Off?

August 07, 2008 12:14 PM
by Anne Szustek
Sony has bought Bertelmann’s stake in what was major record label Sony BMG. But will the venture overcome industry troubles or worsen the company’s already aching bottom line?

Sony Pushes for a Greater Whole

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In 2004, Sony Corp and German media company Bertelsmann got together to help each other buffer a record industry suffering at the hands of Internet music downloads. At the time of the merger, analysts were doubtful as to the viability of the conglomerate, especially because AOL-Time Warner—another early-decade partnership that has recently fallen to the wayside—failed to court EMI as Sony and Bertelsmann were in talks.

But following a quarter in which Sony posted losses of $49 million, down year-on-year from earnings of $21 million, the company, whose interests encompass movies, video games and mobile phones, decided to take over Bertelsmann’s 50 percent stake for the price of $900 million, renaming the label Sony Music Entertainment, Inc.

Business media personality Jim Cramer examined the reasons behind Sony’s sluggish performance in a July 29 video on The Street. “It’s like people stopped buying anything that’s expensive,” Cramer said. “I don’t want to say they’re in real trouble, because it’s too good a brand name … and they have lot of assets.”
Reuters breaks down the deal into numbers: “The German company gets $300 million in cash on Sony BMG’s balance sheet, valuing the deal at about $1.2 billion, though the value to Bertelsmann, including tax breaks, is higher.”

Pending approval by regulators, Bertelsmann will retain control of a small number of European artists that brought the label some $20 million last year. But the major subsidiary labels, including Arista, Jive, Zomba, Epic and Columbia, are to be all Sony’s.

The conglomerate is looking to wield its newfound music stake to diversify content across its merchandise range. “This acquisition will allow us to achieve a deeper and more robust integration between the wide-ranging global assets of the music company and Sony’s products.” Sony CEO Howard Stringer was quoted as saying in Wired.
Unification has been a keystone of Stringer’s business strategy since he took the helm of the company some three years ago. At that time, “Sony was so dysfunctional—and divisions guarded their territory so fiercely—that managers working for one division wouldn't return phone calls from their counterparts in another division,” Forbes reports.

Now the company is more streamlined—a trend Stringer was looking to take to its merchandise before the company announced it was subsuming Bertelsmann’s stake.

Stringer is likely to push to have the music content synergized across Sony’s product lines. Indeed, Bertelsmann’s holdings in Sony-BMG may lend some help to the technology company’s flagging divisions, such as its joint mobile phone venture with Ericsson. “Having control over a lucrative stable of recording artists like Britney Spears, Whitney Houston and Justin Timberlake will be an added boost if they are welded onto devices and products,” writes Forbes.
But BusinessWeek argues that Stringer’s confidence that the newly named Sony Music Entertainment will, as he said, “provide a deeper integration between the music company and Sony’s [consumer electronic] products” may be a bit hasty: “Sony BMG hasn’t been hitting it out of the park of late,” wrote the magazine.

And Cramer argued on his July 29 clip that further fragmentation of the company, rather than adding more layers of product, is the tonic to Sony’s ailing balance sheets, even though the company is hesitant to do so.

Background: Sony BMG

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