Deal Would Give Record Business a New Spin

The $163.4-billion merger of America Online and Time Warner would have a dramatic effect on the future of the record business--bolstering the value of music content and accelerating the timetable for electronic distribution of audio recordings on the Internet.

The deal would put Time Warner--which over the last decade has fallen from first to fourth place in music sales among the world’s five recording giants--back into the limelight by giving the media giant’s struggling record division a competitive edge in reaching music customers on the Internet.

It also sets the stage for the possible takeover of other entertainment companies with music holdings, many of whose stocks soared Monday on Wall Street after the announcement of the AOL-Time Warner pact. The deal also would benefit the business by giving the world’s biggest online distribution company a financial incentive to stop electronic theft and institute measures to protect the copyrights of its new musical assets.

“Everybody in the music business has been feeling around in the dark trying to figure out what to do in terms of downloading and developing a strategy on the Internet,” said Roger Ames, chairman of Warner Music Group. “Now we’re in business with guys who are experts in that field--the way that we are experts in ours. This is one of those fabulous moves where one plus one should equal three.”

Analysts and competitors cautioned that the newly merged organization could run into serious problems, however, if AOL and Time Warner fail to integrate the drastically different cultures of the two corporations.

Before the deal, AOL has supported the rights of Internet users and ignored industry concerns about digital piracy. Just two years ago, AOL opposed the creation of the Digital Millennium Copy Act, a legislative effort that sought to revise the copyright laws to ensure protection for content appearing on the Internet. AOL also rejected music industry pleas regarding payment for copyrighted music that aired on Web radio broadcasts.

The Internet provider, however, would probably change its tune as the corporation would have a significant financial stake in protecting the musical recordings of its new partner.

Although the merger would do little to stem the tide of electronic theft that threatens the future of the music business, it would significantly influence the business strategies of the corporation that services more than 22 million Web users.

“This deal . . . requires--for the first time--that an Internet company be concerned about protecting the value of the musical content it is distributing,” says Hilary Rosen, head of the Recording Industry Assn. of America.

The merger would almost certainly hasten the destruction of the traditional brick-and-mortar retail distribution system and become the electronic distribution model of the future. At Monday’s news conference, Time Warner Chairman and Chief Executive Gerald Levin said he believed “the digital downloading is the most efficient delivery for music.”

Music executives believe that digital distribution of music will revolutionize the industry by dramatically cutting manufacturing and shipping costs associated with delivery of audio recordings to retail outlets. It also will slash millions of dollars spent annually trying to persuade retailers to place products in prime spots in stores.

In the future, music fans no longer will have to visit retail stores to purchase recordings, but will be able to download their music directly over the Internet. Most computer owners, however, currently access the Internet through telephone modems, which take more than hour to download a typical record album. In the next few years, analysts expect many computer owners to upgrade to cable connections that allow consumers to download albums in minutes.

As the music industry prepares to shift from traditional distribution to electronic download of music, the world’s five-biggest record conglomerates face a plethora of problems in dealing with the transition. Although Time Warner appears now to have the upper hand by virtue of its investments in broadband cable and AOL, it’s clear that the merged company, like other entertainment corporations, would be forced in the future to reduce prices on the Web and invent ways to entice consumers to buy copyrighted recordings--instead of stealing them.

The new deal would certainly give Time Warner an upper hand in marketing and promoting its products on AOL. Although AOL has cut numerous deals in the past with a variety of Time Warner’s competitors, that would not prevent AOL from hyping Warner Music Group songs and videos on its home page, for instance.

Still, the AOL/Time Warner deal puts a premium value on all musical content, validating Seagram’s recent $10.4-billion purchase of PolyGram and creating a financial environment friendly to other future investments in the music arena.