Label Mergers Are Music to Indies' Ears

As the record industry's leaders rush to combine, upstart companies say the trend will work to their advantage

The latest wave of consolidation in the ailing music industry could mean that 75% of the music sold in the world would be controlled by just three companies. Consider the headlines of the past several weeks: Sony Music Entertainment, a division of Sony (SNE ), plans to merge with BMG Entertainment. Meanwhile, No. 1 music company Universal Music Group is snapping up the record division of movie studio DreamWorks for an estimated $100 million. And the Warner Music Group, a division of Time-Warner (TWX ), and EMI continue to explore combining operations.

This sharp contraction will send ripples through the music industry, but executives of independent music companies don't seem too worried. Their message to the music giants: Merge away. In fact, this new consolidation, and the resulting pressure to cut costs, will create enormous opportunities for them, the smaller fry figure. As management and artists get dropped by major labels, the upstarts will be able to recruit new executive talent and sign acts looking for more nimble handlers.

Result: Independent record labels think they'll grab a larger share of the music market, after dropping to 25% from 28% four years ago. "We're ushering in a period that will be the blooming of a thousand independents," says Steve Gottlieb, CEO of TVT Records, which has about a 1% share of the music market. TVT's roster of artists includes Lil Jon & The EastSide Boyz, Sevendust, and Default.


  Taking a long-term view, the consolidation makes no sense to some veteran music-industry followers. "Merging doesn't get you more or better music," says Hal Vogel, founder of media investment firm Vogel Capital Management. "It only stifles creativity, as executives worry more about budgets and who's going to be the next to go out the door."

The cost controls that big music companies say they're seeking in consolidation have been standard business practice with smaller independents all along. In a leaner industry, the leaner operations will thrive, so bring it on, they say. Bigger and fewer music companies "just won't be as friendly to artist development," says Cliff Chenfeld, co-founder of Razor & Tie, whose roster includes Dar Williams, Brand New, and 40 Below Summer. "I see more opportunities for us, not less." (Privately held Razor & Tie has a distribution deal with fourth-largest music outfit BMG.)

Artemis Records, for example, can sell 100,000 copies of an artist's CD and make a profit, while it takes sales of a million or more for a major to make money, says music-industry vet Danny Goldberg, Artemis' founder. That's because indies have lower fixed costs, pay less for promotions, and have less staff to support. What will happen as a result of these mergers is that more performance-based deals with artists will be struck, rather than "deals based on what you hope they will sell," says Goldberg. Artemis' roster includes Steve Earle, the Pretenders, and the late Warren Zevon, whose final album, The Wind, is one of the label's big sellers.


  Driving this new merger wave is the 20% decline in music sales over the past three years. Labels blame the precipitous falloff on piracy and online file-sharing, while some consumers point to lousy music offerings. The merger rationale is that by combining operations, costs can be cut, offering some leeway to the big music companies pressured by shareholders to try to gain traction selling tunes online.

Is consolidation a Band-Aid approach? "It allows for a 36 month solution," says Gottlieb. "Once the costs are cut, there are no economies of scale. Look, it's not like scale has insulated any of the big music companies from the real problems the industry faces."

Being big still has its advantages in exerting leverage to get new artists on the radio and on the shelves of big retailers, like Wal-Mart (WMT ), Best Buy (BBY ), and Target (TGT ). But as online music becomes more popular, the majors' leverage "doesn't count as much," says Vogel. "The cost of distributing your product doesn't cost nearly as much per unit in cyberspace."

Like the wake-up call that piracy sent to the music moguls, perhaps watching more and more acts on independent labels rocket up the charts might serve as yet another reminder to the Big Labels that their industry needs fewer tourniquet approaches and more strategic thinking.

By Tom Lowry in New York

Edited by Douglas Harbrecht

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