(Reuters) (11/10/03)

By Daisuke Wakabayashi

Edited By Michael Bennett

TOKYO, JAPAN - The merger of Sony Music and BMG could bring a whole new stable of recording artists to listeners hooked on Sony Corp.'s electronics, but analysts say the alliance is more about minimizing risk than seeking gain.

The proliferation of file-sharing services such as KaZaa and a weaker retail market pushed Sony's music business -- eight percent of group revenues -- into the red, with an operating loss of $79 million in the year to March 31st.

"This deal might not help in terms of profitability, but this is about Sony minimizing its risk," said Standard & Poor's equity analyst John Yang.

Sony and German media firm Bertelsmann AG announced on Thursday that they had signed a non-binding letter of intent to form a 50-50 music joint venture to be called Sony-BMG, pending regulatory approval.

The joint venture combines No. 2 Sony, which includes such artists as Beyonce Knowles and Bruce Springsteen, with No. 5 BMG that is home to Britney Spears and Elvis Presley.

It creates a powerhouse that rivals leader Universal Music Group The merged unit would grab a 25.2 percent share of a global music market valued at $32 billion in 2002. Universal Music has a 25.9 percent share.

Analysts, however, dismissed the notion that this would lead to a major bump in earnings.

"We do not see increased size as necessarily leading to increased profits," said Deutsche Securities analyst Fumiaki Sato in a note to clients.

Last week, Chief Executive Nobuyuki Idei and other top Sony officials laid out a three-year $3.1 billion restructuring plan aimed at overhauling its struggling electronics business, which is suffering from an aging lineup of products.

One of the pillars of the plan was a convergence of its entertainment businesses -- movies, music and video games -- through an integration of assets. Sony would then seek out linkages with it's electronics business.

Analysts said the music alliance and last week's announcement of a joint venture with South Korean rival Samsung Electronics Co. Ltd. in liquid crystal display (LCD) panels signals an effort by Sony to diffuse risk when possible.

The market took the news in stride. Sony's shares finished Friday's trade up 1.78 percent at 4,000 yen, compared with a 0.73 percent rise in the Nikkei 225 average.

The announcement of Sony-BMG comes 35 years after Sony first entered the music business in 1968 through a joint venture in Japan with CBS Records, which held 20-percent of the global marketplace at the time.

Two decades later, Sony would acquire all of CBS Records and a year later, it would pay $3.4 billion in cash for Columbia Pictures in what was the largest purchase ever by a Japanese company.

The music and movie businesses became pillars of Sony's strategy to combine its hardware products -- televisions, DVD players and Walkmans -- with hit software titles.

In recent years, Sony Music has fallen on hard times. It cut staff, reduced costs and ousted former head Thomas Mottola, the man credited with jump-starting the career of Mariah Carey.

Even though Sony's strategy to integrate software and hardware businesses has been replicated by other corporations, such as Microsoft Corp, some industry watchers have suggested the company's entertainment divisions have thwarted growth efforts at its mainstay electronics business.

A July article in Barron's suggested that Sony's ties to the music business prevented it from pursuing a product such as Apple Computer Inc.'s iPod digital music player, due to concerns it might encourage piracy.

Furthermore, the phenomenal success of iPod has been pointed to as a sign that Sony has lost its innovative magic that spawned the Walkman and proved that a product can "out-cool" Sony in its own backyard.

"The question is why didn't they get into iPod and iTunes like Apple did and they still haven't gotten there," said ING analyst Richard Chu.

Earlier this week, Sony said it would launch a rival to Apple Computer Inc.'s iPod digital music player next year for as little as $60, a price only one-quarter or less than the $200 to $400 Apple charges for various versions of its sleek product.

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