ARE EMI, BMG CLOSE TO DISTRIBUTION PACT?
The move, the first major step in what insiders see as a move to further consolidate the business and control costs, resembles the dot-com-boom theory of "coop-etition," whereby competing businesses can cooperate on some aspects of their businesses to the benefit of each. Insiders expect Warner Music to be next to consolidate its distribution functions, entering discussions with both Sony and BMG. The companies are counting on Federal Trade Commission approval for the moves.
EMI chief Eric Nicoli, in warning last week that EMI profits would be off some 20% for the year, intimated that such a move was in the offing. And a recent memo from EMD topper Richard Cottrell to his staff detailed the company’s plan to exit the physical end of the distribution business, saying that EMI was in "active discussions with a number of parties" and expected to announce a move before the end of the year.
"EMI will be…moving towards Shared Services, and continuing to manage costs aggressively," he wrote.
Consolidation of distribution has been on the horizon for some time, as label groups have struggled to remain profitable in the face of spiraling costs. None had actually made a move to combine operations, however; in making the deal with BMG, EMI is likely to cause a "domino effect" among the other groups, which are expected to move quickly to merge their physical distribution businesses.
In the wake of failed merger efforts with WMG and then BMG last year, EMI has talked with both UMG and WMG about taking over its distribution functions, but BMG has emerged as the most likely landing place because it has offered the the best deal. EMI could stand to save $50-60 million annually by cutting out manufacturing and warehousing.
Separately, UMG and Sony have also discussed effecting a shared-services distribution strategy, but those talks are said to have been put on hold for the time being.
The FTC, leery of anti-competitive moves on the part of the Big Five, is said to be open to the idea of consolidated distribution, so long as the labels retain their own sales forces and continue to make their own deals with retailers. While that would appear to limit the extent to which labels will be able to pare down their distribution companies, industry watchers are viewing this as merely the first chapter in what will prove to be a very different story for the music business as shared services become the rule, rather than the exception.
