Collapse of Time Warner-EMI Deal Is Sweet Music to Rival Companies

The proposed $20-billion merger of Time Warner and EMI Group is dead in the water--and unlikely to be resuscitated.

The decision early Thursday by the two entertainment giants to abandon their plan to join forces is a face-saving effort to avoid having the proposal rejected by the European Commission.

The deal fell victim to a creeping policy change in the European Commission implemented in the last year by Mario Monti, the new commissioner in charge of competition policy.

When the merger was announced in January, most analysts believed it would sail past European regulators in the same way that Seagram’s acquisition of PolyGram, a much larger deal, did several years ago. But Monti, a former professor from Italy, surprised Time Warner by threatening initially to block the EMI deal as well as its pending merger with America Online.

Time Warner and EMI offered late last week to dump Virgin Records, a huge chunk of the Warner/Chappell music-publishing business and a piece of EMI’s distribution operation to appease Monti’s antitrust concerns, but to no avail.

Executives at EMI and Time Warner issued a joint statement Thursday saying they intended to “continue discussions with each other and antitrust regulators in order to achieve a combination which is acceptable to all parties.”

But analysts doubt that any such arrangement can be devised.

Time Warner and EMI said they hope to submit a new proposal sometime in the next few months, but the new plan is likely to pale in comparison with the deal that bit the dust.

The original concept would have combined two struggling record companies and created the industry’s second-biggest music conglomerate. But now, the troubled music divisions of Time Warner and EMI are likely to remain fourth and fifth, respectively, in sales of music in the U.S., the world’s biggest market.

The deal’s collapse solidifies the industry’s lineup of five major record conglomerates, with Universal Music Group at the top of U.S. sales, followed by Bertelsmann, Sony, Warner Music and EMI.

The deal’s demise also illustrates how personal rivalries can sometimes affect corporate futures in the music business.

Indeed, executives at competing entertainment companies lined up to try to destroy the deal, filing lengthy complaints with antitrust regulators overseas and in the U.S. Seagram, which recently became the industry leader after acquiring PolyGram, led the pack in trying to obstruct the merger.

As the deal was under review, officials at Seagram’s Universal Music Group were battling behind the scenes with Warner Music Group Chairman Roger Ames, with each company trying to poach executives from the other. Tempers flared earlier this year when Universal wooed an executive under contract to Warner Bros. Ames returned the volley by hiring one of the top executives at Universal’s Interscope division to run Warner Bros.

Adding to the animosity between the two companies were Time Warner’s firing of Doug Morris, who went on to run Seagram’s music division, and Seagram’s forcing out of Ames, who used to be a top executive at Universal-owned PolyGram. There has been a series of disputes between the two companies in the last year, during which Seagram lobbied hard to obstruct the EMI deal.

Disney, which gobbled up Capital Cities/ABC, also turned up the heat in trying to obstruct the deal after a dispute in May with Time Warner about cable licensing fees. Disney has lobbied hard to derail both of Time Warner’s merger proposals with antitrust regulators here and abroad. Officials at Sony, Bertelsmann and myriad independent labels have also done their best to block the deal.

Another factor contributing to the deal’s collapse was pressure from executives at AOL, who began lobbying Time Warner early on to sacrifice EMI as a concession to keep its own deal intact.

Once the dominant and most respected operation in the record business, Time Warner has seen its music profit and market share dwindle to 13.6% in recent years. Warner’s decline followed a decade of turmoil that gutted the management team and shattered morale.

EMI, the crown jewel of the British media business, has also experienced difficulty building its business in the U.S. and has endured a series of management shake-ups. The company has been the subject of on-and-off takeover speculation for the last four years.