Sony Moves to Synchronize Its Music and Electronics Business

Sony Corp. is moving to synchronize its consumer electronics and music business following the collapse of its troubled partnership with Bertelsmann AG.

Known as Sony BMG, the collaboration had become the world’s No. 2 record label since its establishment four years ago, and had generated substantial cost savings while pre-empting other consolidation within the industry. However, the cost cutting initiatives could not keep pace with declining CD sales, and the digital strategies of the two companies were out of alignment. The partnership was subsequently terminated on October 1, with Sony buying out its former partner’s 50 percent stake for $900 million. 

Bertelsmann will now be free to focus on its growing publishing business. Sony, on the other hand, will now have full control of the music venture, which will be called Sony Music Entertainment Inc., which aims to drive sales of consumer electronics in much the same way Sony Pictures helped market the Bravia TV lines. 

“It’s nice to see Sony at least trying to line up some of their content efforts with their hardware,” Michael Gartenberg, vice president of global strategy for Jupiter Media, told the AP.

“Up until now, the left hand never seemed to know what the right hand was doing.”

In fact, the music venture was so discordant it often helped Sony’s rivals.

In one such case, Bertelsmann insisted the venture sell music videos to Microsoft’s Xbox 360 instead of Sony’s PlayStation 3 gaming unit “to make sure it’s a fair deal for Bertelsmann,” according to one Sony executive who asked the AP to remain anonymous. As a result, users of PlayStation 3 are now without music videos from Sony BMG.

In another instance, Sony BMG was the last major record label to join the PlayNow Arena online music store from Sony Ericsson, Sony’s own mobile phone venture. 

“(Sony BMG) has been by far the toughest agreement to get in place,” Victor Fredell, Sony Ericsson’s content acquisition manager of music, told the AP.

Fredell cited Sony BMG’s 50-50 ownership, which gave neither company a clear upper hand, for the problem.

“They were just different in their approach to the business,” Jay Cooper, a music attorney, told the AP.

“I think they managed to put together a strong company but unfortunately they had two different kinds of philosophies.”

In sharp contrast, Sony easily made “Hancock” from Sony Pictures available online for Bravia TV users for just $9.99 before the DVD release.  Sony hopes such exclusive offers will boost sales of Bravias and the $299.99 Internet modules made by Sony Electronics.

Sony has already started streamlining its music group this month, merging two labels that were former run separately by Sony and Bertelsmann.

Next comes a push to better integrate Sony music with Sony Ericsson mobile phones, which had a mere 8 percent market share in the second quarter, the Sony executive said.

It’s a significant challenge, and even companies such as Apple Inc. have not yet perfected their mobile phone music business.  iPhones, for instance, can’t directly download iTunes music.

“This is their opportunity to find some way to challenge Apple in a space that they don’t completely own yet,” Gartenberg said.

Whether Sony can succeed remains a question.

Nokia Corp. will launch its much anticipated “Comes With Music” venture in Britain next Thursday, a service for which a year of free downloads is included with the purchase of a phone. Prepaid models start at about $229.

Whether such mobile music offerings gain traction will depend upon fickle consumer tastes, whether that’s for Nokia’s all-you-can-eat model, or Sony’s and others’ pay-as-you-go system.

“And then you have to assume that people want music on their phones,” Russ Crupnick, a digital music analyst for NPD Group, told the AP.

“I think the jury’s still out on that.”

Last year, the entire music market decreased by almost 10 percent, as measured by album sales.  And it’s down another 5.4 percent so far this year.   As a result, major labels are making more music available less expensively on a larger number of platforms and devices, in the hopes the digital downloads will reinvigorate business.

But digital strategy matters more for Sony than for most, since it is close to slipping into to No. 3 market position.  According to data from Nielsen SoundScan, Sony now has a 22.8 percent market share in the United States, down from 28.5 in 2004, while Warner rose from 14.7 percent to 21.1 percent during the same time.