Posted by: Kenji Hall on August 6, 2008
After a four-year music alliance that was marred by management infighting, Japan’s Sony and Bertelsmann of Germany said yesterday that they have agreed to part ways (pending U.S. regulatory approval).
By cashing out of its 50% stake in Sony BMG, Bertelsmann stands to receive $900 million. In addition to that, Bertelsmann will get $300 million in cash from Sony BMG’s balance sheet, and it’s expected to take with it some European music rights. Sony’s U.S. operations will now own the soon-to-be-renamed Sony Music Entertainment Inc. The recording company—the world’s second-largest behind Vivendi’s Universal—has a quarter of the music market and a stable of stars including Justin Timberlake, Beyonce, Christina Aguilera and Usher.
For Sony, the split-up is good news. Analysts say they were surprised to learn that the $3.9-billion company was sitting on such a big cash stockpile. In terms of earnings, Sony Music Entertainment won’t boost the numbers much. But it won’t hurt them, either. They’re expected add 2.2% to sales and almost nothing to profits if Sony consolidates the business in the second half of the fiscal year. (Though profit margins are 8%, profits will be offset by a restructuring charge this year, analysts say.) But in the past two years Sony BMG’s contribution under the equity method to Sony’s bottom has doubled to $92 million from around $46 million. And Goldman Sachs expects the contribution to grow over the mid term.
More importantly, it gives Sony another sizable trove of digital movies, videos and music that the company can draw on for its lineup of cellphones, portable media players and other electronics gizmos. And the timing couldn’t be better: Sony is in the midst of a major push to improve the design of its products so they’re more compatible with each other.
The hope is that consumers will eventually get to seamlessly zip digital music and video files between their TVs, DVD players, gaming consoles, portable music players and myriad other hybrid products. Sony is closer to that goal but not yet there.
Sony will also be glad to have the constant grapple for power over Sony BMG behind it. Tensions between the two sides over Sony BMG’s management had grown messy and public in recent years. Bertelsmann execs had criticized Sony BMG CEO Andy Lack for his inability to make the joint venture as it was supposed to, and Bertelsmann board member Rolf Schmidt-Holtz later replaced him. Only insiders will know whether the two sides got anything out of the venture.
I’d love to know whether the two sides were sharing copyright protection technology—so-called digital rights management. I raise the question because DRM has been a huge headache for Sony in past years. Analysts have blamed the debate over which DRM to use for Sony's slowness in going after Apple's dominant iPod. Only recently has Sony’s top brass ordered all of the electronics division to adopt the same DRM. No doubt Sony needed to be on its own so it could make these kinds of decisions faster and across its various divisions. Let’s hope this lets Sony shift into high gear.