BMG Entertainment was until 2004 the record company division of German media giant Bertelsmann. Despite its size, the group was for many years overly reliant on an ageing portfolio of big-name acts (such as Elvis Presley), and struggled to establish a strong management team. From the late 1990s the company was repeatedly engaged in on-off merger talks with its peers in a bid to cut costs and counter falling sales. Finally in 2004 Bertelsmann merged its recorded music division with that of Sony to create jointly owned Sony BMG. BMG Music Publishing was sold in 2006. Two years later, Bertelsmann agreed to sell its remaining 50% stake in Sony BMG to Sony, but kept ownership of rights to selected back-catalogue which became the core of a new BMG-branded licensing division.
Bertelsmann's first steps into music grew from the success of Lesering, the book club it formed in 1950. There was a clear opportunity to add records to this service, so in 1956 the company formed Ariola Records to distribute a selection of light music and operetta. As with Lesering's books, Ariola records were at first sold direct to customers by mail order. The label quickly became one of Germany's biggest music companies, and in 1958 the group formed Sonopress to physically manufacture the records it distributed. During the 1960s and 1970s, Ariola continued to expand in Germany, shifting from mail order to retail sale and acquiring local rivals such as Hansa (to form Ariola-Hansa). However it was outpaced in the fast-developing international marketplace by US and British companies. By the mid 1970s other divisions of Bertelsmann had begun to broaden their profile by acquiring international competitors, and the music division took the plunge in 1979, purchasing the extremely successful American independent label Arista Records.
Arista was controlled by Clive Davis, a legendary figure in the music industry. During the 1960s and early 1970s, he had been head of Columbia Records, with control of the prestigious CBS and Epic labels. In 1973, he left that company to become an independent consultant to Columbia affiliate Columbia Pictures Industries (CPI), owner of minor labels Bell Records, Philly Groove and others. The following year, he formed Arista Records with backing from CPI, taking with him the Columbia Pictures music catalogue and a selection of artists from the Bell label. One of these was the then-unknown singer-songwriter Barry Manilow, whose first release for Arista, the single Mandy, became a huge international hit. Supported by Manilow's commercial success, the label signed a wide variety of other artists from every musical genre. These included punk icons Patti Smith and Iggy Pop, militant jazz poet Gil Scott-Heron, and British teen band the Bay City Rollers. Over the years that followed the label was home to Lou Reed, Grateful Dead, The Kinks, Ray Parker Jr and many others.
Although the combination of Arista and Ariola benefited both companies, the merged label was still dwarfed by larger players. In 1987, Bertelsmann joined the ranks of the majors with the acquisition of the legendary RCA Records Group. Radio Corporation of America had been formed by General Electric and Westinghouse in 1919, originally to promote the radios they manufactured. In 1926, the company also established the National Broadcasting Corporation (NBC) to provide a national broadcasting network for its content. Three years later it bought the Victor Talking Machine Company, the world's biggest making of phonographs, and began to make its own hardware. RCA was granted its independence in 1930, when GE and Westinghouse were forced by anti-trust regulators to sell their stakes. The company moved into television later that decade, establishing NBC as one of the country's biggest networks, and RCA Records came to dominate the US music industry in the 1960s as a result of the huge success of one artist in particular, Elvis Presley, who had signed to the company in 1955. However NBC's fortunes began to wane in the 1970s, and the record company appeared to lose direction after Presley's death in 1977. In 1986, the group was reacquired by General Electric, which retained the television network but put the record company and other assets up for sale.
Bought by Bertelsmann, RCA was merged with Arista/Ariola to form BMG. The creation of this new group came just in time for the breakthrough of another major global artist, Whitney Houston, who was to prove one of the company's biggest commercial successes over the next decade. Clive Davis had continued to play an important role within BMG after the acquisition of Arista, and in 2000, BMG and Davis announced the formation of a new joint venture label, J Records. However, the global music industry was already under immense pressure from the rapid spread of online music piracy as well as a shortage of major new artists. Like its peers, BMG made several efforts to strengthen its position through consolidation. A merger with the UK's EMI Group looked likely in 2000, but these plans eventually foundered at the end of the year.
To counter the slump in sales and profits, BMG launched a restructuring of the business in 2001, merging subsidiary divisions and either divesting or taking full control of several affiliated labels in which it held a minority shareholding. By far the most successful of these joint ventures was Jive/Zomba, the pop label whose acts included Britney Spears and N'Sync. Originally an independent label, Zomba entered the fold in 1996, when BMG acquired a 20% stake in return for distribution rights. That shareholding subsequently rose to 50%, but Zomba's founder Clive Calder also negotiated a "put" option, allowing him to force BMG to buy out his remaining shares at a future date. The label enjoyed enormous success towards the end of the decade, and by 2001 it accounted for almost a third of BMG's North American sales. In 2002, Clive Calder announced that he would exercise his "put" option. Although this promised to strengthen BMG's portfolio, it was also likely to be extremely expensive. To limit the cost in cash, Bertelsmann group CEO Thomas Middelhof reportedly agreed a deal whereby Zomba chief Clive Calder would become head of a merged BMG/Zomba, and would be paid in shares in both Bertelsmann group and its BMG subsidiary.
Meanwhile Middelhof had also engineered a highly controversial alliance with digital distribution site Napster, then a pirate network which allowed individuals to share copyrighted material with one another for free. Middelhof's support of internet-based businesses had already led to a transformation of Bertelsmann's fortunes during the late 1990s. Prior to the deal with Napster, the company had initiated numerous online initiatives in an attempt to counter the rapid spread of illegal peer-to-peer music sharing, including the GetMusic.com partnership with Universal Music, and a subsequent partnership with Sony to launch consumer digital download service MusicNet. None of these made money, or even began to curb the corrosive effects of Napster, then widely regarded as the primary cause of all of the financial problems with which the music industry was struggling.
Middelhof was well ahead of his time in seeing the potential benefit from Napster if it could be converted into a legal file distribution service and in 2000 he broke ranks with the rest of the industry by agreeing to lend the company financial support as it battled a series of lawsuits from other record companies. In 2002, with Napster on the verge of collapse, Bertelsmann agreed a rescue package for the brand by buying out its shareholders and taking control of the business. But mid-year, a US court ruled against the sale to Bertelsmann, effectively killing the business. (The Napster brandname was subsequently acquired by software company Roxio, which successfully relaunched it as an entirely legal download service in 2004.) At the same time, Middelhof was attempting to persuade the Bertelsmann board to accept the deal he had outlined with Clive Calder over Zomba. That deal would have involved diluting the shareholding of Bertelsmann's controlling shareholders, the Mohn family. Coming in the wake of the Napster fiasco and problems in other parts of the group, the board refused to back Middelhof's plan, and the disagreement led to his resignation as CEO. The Zomba deal was subsequently agreed for $2.7bn in cash, increasing the group's debts to over E7bn.
Also in 2002, Clive Davis was lured back to BMG when the group bought out his remaining stake in J Records, and merged it into RCA. Davis was appointed head of the enlarged RCA business, and became interim head of all of the company's labels in 2004, following the abrupt departure of former Arista Records CEO Antonio Reid. By now however, a full merger of BMG with another group seemed inevitable. In 2003 it was reported that Bertelsmann was in discussions with AOL Time Warner over a combination of BMG with Warner Music. Those two companies even made preliminary approaches to regulators in Europe before falling out over their respective valuations of what each was bringing to the party.
Instead, BMG agreed a new merger deal with Sony in November 2003. Initially, European regulators voiced major reservations over the merger, encouraged by negative campaigning from independent record companies who feared the creation of an effective duopoly between Sony BMG and Universal. However Sony and BMG were reported to have delivered an impressive and wide-reaching defence of their position. A final ruling was delivered at the end of July, clearing the merger without conditions.
Even before the Sony merger, BMG had scored the best-selling record of 2004, with Usher's Confessions, which sold more than 12m units. Other top-selling artists during the year were Avril Lavigne, Outkast, Dido and Maroon 5. Yet in its last year as a separate division, BMG reported further erosion of revenues as a result of weak exchange rates and the continuing effect of piracy. Sales for 2004 dropped 6% to E2.5bn, although operating income more than tripled to E162m. Bertelsmann retained control of its BMG Music Publishing until 2006, when it was sold to Universal Music Group.
Also in 2006, a European court ordered that the ruling allowing the merger of Sony and BMG should be revisited. A review of the merger began in 2007 but it was eventually approved for a second time without conditions.
Last full revision 12th October 2016
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