Fear, technology drove Warner Music-EMI merger, consultant says

With the merger of the music units of Time Warner Inc. and EMI Group PLC come plans for the $8 billion joint company to create a music industry powerhouse both on- and offline.

Technology drove the deal, which was announced today, and "so did fear," said Gary Arlen, president of Arlen Communications Inc., a consulting firm in Bethesda, Md.

Internet users have increasingly bought, sold and traded individual songs online, often without paying proper royalties to the owners of the material. MP3 is one of the most popular compression formats for music traffic.

Record companies, meanwhile, have resisted the movement to online distribution, for fear of losing the hefty profits they make through traditional record-store sales. Recording industry trade groups have also fought the MP3 standard, saying it too easily lets users trample copyrights.

"The Internet is an unknown," Arlen said. "No one quite knows which way the music business is going, but they know they have to be online."

Some major artists, including EMI's David Bowie, have long favored the downloading of music for free or low prices.

EMI and Warner Music Group have separately supported the Secure Digital Music Initiative, an effort by record companies to create a rival to MP3 that blocks users from hearing music unless they have paid appropriate fees to copyright owners.

Internet technology was a big impetus for the merger, but not just as a sales channel, EMI acknowledged in a statement.

"EMI is optimistic about the prospects for the music industry. However, ... EMI's continued success requires an increasing commitment to new media [and] increasing manufacturing and distribution efficiencies...," the statement said.

Warner Music Group runs CDNow, a Web site for buying CDs and getting music news.

Warner EMI Music, as the merged company will be called, expects to save $400 million per year within three years, by sharing manufacturing and distribution costs and the cost of investing in new media.

The new company is also expected to leverage its connection to America Online Inc.'s 20 million subscribers, but no specific plans were announced.

AOL last week said that it would merge with Time Warner Inc. in a $30 billion deal expected to close in the next few months.

Copyright © 2000 IDG Communications, Inc.

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