Musical Mergers

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Pretty soon you probably won't be hearing about the major problems with the five major record labels. No, music sales aren't necessarily on the rise. It's just that the quintet is in the process of downsizing to a quartet -- or possibly even a trio.

With Sony (NYSE: SNE) and BMG agreeing to merge their music operations last week, along with the possibility that love songs are in the air between Time Warner (NYSE: TWX) and EMI, the sector consolidation may turn this beleaguered industry into a squeezed accordion in no time flat.

Along with Vivendi's (NYSE: V) Universal Music, the five companies have suffered through three consecutive years of declines in prerecorded music sales and the first half of 2003 offered no respite. While Nielsen//NetRatings has reported that traffic to peer-to-peer song swapping sites has declined significantly since the music industry starting going after individual consumers over the summer, there is little evidence that industry will grow in 2003.

No, if anything, the fact that so many of the major labels are still looking for exit strategies indicates that the prognosis has only gotten worse. Scaring music listeners away from music piracy hasn't helped the industry as much as it has alienated potential fans.

Meanwhile, Vivendi's garage sale continues, which means we might very well be looking at a duet before all of the white flags are tallied. That might be just what the industry needs to finally start making beautiful music together.

With less decision makers and a more concerted effort to win back fans while growing high-margin digital distribution outlets like Apple's (Nasdaq: AAPL) iTunes (which is off to a strong start), let's not kill off the music industry just yet. The line between carnage haul and Carnegie Hall is much thinner than you think.

Will the relaunched Napster and Apple save the music industry? The margins are rich in the inventory-free age of digital distribution, but what will it take for the major labels to prosper? All this and more -- in the Apple discussion board. Only on Fool.com.