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European regulators have approved the merger between Sony Music (NYSE: SNE) and Bertelsmann Music Group, leaving only U.S. approval before the two companies can come together to create the world's second-largest music business.
Financial terms of the deal 
have not been disclosed and the merger excludes some activities. For instance, each company will continue to handle its own CD production and distribution and will maintain its own catalog of copyrights.
Still, industry analysts said the green light from the European Commission and the likely approval from the U.S. Federal Trade Commission, which is expected at any time, could lead to other major mergers in the industry, which has struggled to deal with slower sales in recent years.
For instance, analysts will be watching UK-based EMI and Warner Music, which is based in the United States. The two have had on-again, off-again merger talks and have had one merger proposal shot down by the EC.
Perhaps anticipating that trend, the European Commission's decision was accompanied by a statement that said it would "keep a close watch on the music sector as it becomes even more concentrated and very carefully scrutinize any further major concentration in the industry."
Changes to Come
Sony and BMG have not disclosed their post-merger plans for restructuring, but it is widely believed that up to 2,000 jobs will be cut as part of a massive cost-savings push. The combined company will account for about US$5 billion per year in music sales worldwide.
Sony Music Entertainment Chief Executive Officer Andrew Lack said the "creation of Sony BMG is an appropriate and necessary response to current market conditions."
Those conditions include eroding sales of CDs worldwide. Music sales fell more than 7 percent last year and are down an estimated 20 percent since 2000.
Ironically, the merger will cost Bertelsmann Music Group CEO Rolf Schmidt-Holtz control of the company he has been pushing to create since he joined Bertelsmann in 2001.
Schmidt-Holtz, who is credited with getting the merger through after four previous tries fell short, will serve as executive chairman of the combined company, with Sony's Lack taking the CEO role.
Various Theories
Yankee Group analyst Michael Goodman said the music industry has long blamed illegal downloads for its woes, despite evidence that it is not to blame. Most recently, a study by Harvard University and the University of North Carolina showed that sales were down because the industry was releasing fewer records per year. Illegal downloads had an impact on sales that is "statistically indistinguishable from zero," that report said.
"The bulk of revenue declines by the recording industry have been self-induced," Goodman told the E-Commerce Times.
In fact, he said, the shift to more directly downloaded digital music could be a boon for the bottom line of the music industry, by sharply reducing production and distribution costs, assuming the industry can adapt enough to take advantage of the efficiencies.
Jupiter Research analyst Mark Mulligan said that while the companies are having trouble selling CDs, demand for digital music is strong around the world. The recent launch of the European iTunes Store underscored the pent-up demand for legitimate music downloads, Mulligan told the E-Commerce Times.
"They've shown they have the catalog depth to attract consumers," Mulligan said. The companies that can most rapidly adapt will thrive in the new environment, he added.
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