My $0.02 on the Sony/BMG split

Yesterday, Sony and Bertelsmann announced that S will buy up B's half of their 50/50 joint venture record label, Sony BMG, for $900 million (plus an extra $300 in cash holdings B already "owns").

My primary take is that this is a victory for vertical integration in a period of diversifying revenue opportunities for music.

What that means in plain English is this:

Bertelsmann is a content and distribution company. Besides the record label, its main holdings are book and magazine publishers and broadcasters. They make money by producing and distributing information, which is eventually paid for by advertisers and shoppers. Given that music retail is tanking (it could have been avoided, but that's a rant for another time), Bertelsmann has no reason to be in the business any more. It's simply not worth the capital, effort and risk involved for them to try to squeeze out a tiny profit from the sale of an obsolete product category.

Sony, on the other hand, doesn't need to make a cent selling music. It makes its money manufacturing consumer electronics, producing films, and licensing its formats (e.g. Blu-ray, Playstation), and even owns some retail. While the company wouldn't turn its nose up at profits from recorded music, its music division can be an asset for the company overall without any black ink of its own. This is because the music can be licensed on friendly terms to Sony's movies, games, and distribution portals, and can be used to support new technology formats (this doesn't always succeed -- see SACD and minidisc).

The music industry is changing, from a consumer-oriented product model to a business-oriented service model. For the first time in recent history, a double digit percentage of major label income is from licensing and royalties, rather than retail. Sony is well positioned to take advantage of an industry based on diverse revenue streams and cross-channel synergies. Bertelsmann is not.

Of course, there are other issues as well, I'm sure. Corporate culture clash, tensions over globalization, etc. But if the CD retail business was still going like gangbusters, I don't think these would be big enough issues to tear the partnership apart.