Digital Media

The struggling music units of Sony Corp. and Bertelsmann AG merged in 2004 so that a combined company could better fend off illegal file sharing and shrinking CD sales.

(Credit: Ellen Ng/CNET Networks)

The new recording company, named Sony BMG, was expected to wield the kind of resources that could challenge Universal Music Group as the largest of the four top labels. Sony BMG would own a chunk of U.S. music sales almost as big as Universal's.

To say the deal failed to deliver on the promise is probably an understatement. More than four years after the merger, there isn't a more troubled major label around.

In fairness, Sony is trying to regroup after buying out Bertelsmann late last year. It remains the second-largest recording company and currently has the No. 1 album in the country: Bruce Springsteen's Working on a Dream. Sony Music could also become the first major to renew its music licensing agreement with YouTube, according to sources close to the deal. For the recording industry, YouTube represents a potential new market.

But in recent weeks, Sony's woes have taken center stage, overshadowing at times the accomplishments of its stars. Last month, Sony Music reported a 22 percent decline in revenue from the previous year. In December, the Federal Trade Commission fined the label $1 million for collecting information on 30,000 children without obtaining parental consent. The New York Times recently reported CEO Rolf Schmidt-Holtz was steamrolled in negotiations with Apple's Steve Jobs. There is the unflattering press about the unorthodox managerial style of Rick Rubin, the record producer hired to run Colombia Records--he doesn't wear shoes or show up at the office--and the controversial hiring of Amanda Ghost, a songwriter with little administrative experience, to run Epic Records. A Sony spokeswoman declined to comment for this story.

As for Sony Music's digital efforts, the news isn't any less gloomy. The company's market share of digital album and song sales has plunged from 28.6 percent at the time of the merger to 22.5 percent, according to Nielsen SoundScan.

The setbacks at Sony's music division were a hot topic in Los Angeles last week as the industry gathered for the Grammy Awards. To outsiders, the label's troubles can be traced to Sony and Bertelsmann's conflicting corporate cultures. The deep fractures at Sony BMG first became public when executives from the Bertelsmann side of the venture worked to oust Andy Lack, the company's first CEO. Lack had been handpicked by Sony Chairman Howard Stringer, but he lasted just two years.

On the technology side of the house, insiders say Sony has struggled to recover from the Rootkit scandal. In 2005, Sony attempted to quietly place copy-prevention software on CDs. The technology, however, opened security holes on a person's hard drive when a CD was loaded into a computer. The software made the PC vulnerable to malware.

Sony was sued by several parties and was widely attacked by the public and press.

Behind the beat
Since then, Sony has rarely been out in front of the music industry's most important digital initiatives. For example, Universal was the first major recording company to sign a licensing deal with social network, MySpace, and was instrumental in the formation of MySpace Music, the jointly operated music service founded by all four major labels and Rupert Murdoch's News Corp.

When it came to partnering with YouTube, the Web video powerhouse, Warner Music was the first to sign a licensing deal. Sony Music was even the last of the majors to join Sony Ericsson's PlayNow online music store, according to an October story in The Los Angeles Times.

Sony Music's missteps have opened the door for rivals. As the company's share of digital music has declined, Warner Music's has increased. Warner's share of digital sales jumped from 18.10 percent in 2004, to 22.08 percent in 2008, according to SoundScan. This is a vital area, as digital download sales are expected to replace CD sales in coming years.

Certainly, Sony Music has plenty of resources to fuel a comeback. The company owns one of the largest music libraries as well as a stable of established and promising young artists, including Springsteen, Beyonce, and the band Franz Ferdinand. Sony also has a long history in music. The Sony Walkman, its iconic tape and CD players, were synonymous for decades with mobile music.

Of course, the Walkman was eclipsed by the iPod as the public's favorite mobile music player years ago and Sony's attempts to compete with the iPod and iTunes have gone nowhere.

Nobody can say that Sony Music hasn't tried new approaches to building a recording company equipped to compete in the digital age. The trouble is that few of the company's ideas have caught on.

In 2007, Sony raised eyebrows when it began turning to the industry's creative wing for managerial talent. The label hired Rubin, the bushy-bearded co-founder of hip-hop's pioneering record label, Def Jam Recordings. Rubin has produced hit albums for the Beastie Boys, the Red Hot Chili Peppers, Johnny Cash, and Neil Diamond, but his maverick managing style--he continues to produce records for bands at other labels--has irked some at Sony Music, according to The Times' piece.

Sony hasn't had much more success on the digital side. Remember the Ringle?

In 2007, Sony BMG spearheaded an effort to combine songs with ringtones and package them on CDs. This half-single, half-ringtone offer was supposed to help record stores cash in on the ringtone craze as well as help boost physical sales. At best consumer adoption has been lukewarm.

Unfortunately, the same can be said for much of what Sony Music has been trying to sell.