There will always be life under the stars

After Seagram's purchase of PolyGram, Peter Thal Larsen asks if the independents have any future

JUDGED by the events of the past few weeks, the world music industry is becoming a global business, dominated by an ever shrinking number of increasingly large players.

After weeks of frenzied speculation Seagram yesterday announced that it was buying Polygram, the record and film arm of Philips, for $10.6bn (pounds 6.3bn). And most analysts now agree that EMI, the UK group which had been close to a deal with Seagram before negotiations broke down, cannot hold on to its independence for much longer.

Nevertheless, this is not the whole picture. For even as music companies become larger, smaller independent labels appear to be thriving.

True, Polygram can boast big names such as U2 and Sheryl Crow, while EMI has contracts with acts like the Spice Girls. But not all big names are owned by big labels. Oasis, which is arguably the world's most successful rock group of the past few years, is signed up to the ultra-hip, but tiny, Creation Records. The Prodigy has also stuck with XL Recordings, part of the independent Beggar's Banquet label.

In an industry where size is apparently everything, how can the smaller labels survive? The answer lies in the uncertain nature of the music industry. The cost of discovering, developing and promoting a new band can run into millions of pounds with no guarantee of success - a risk the the major groups, with their focus on the bottom line, are increasingly reluctant to take. So instead they let smaller, more nimble groups do the hard work for them.

"The major labels have outsourced their A&R departments to smaller labels," says Boyd Steemson, a former industry executive who now concentrates on managing new bands.

He points to the deal that saw Sony, the Japanese giant, buy 49 per cent of Creation from its founders, Alan McGee and Dick Green, as a landmark. Since then, Sony has pursued a strategy of taking minority stakes in smaller labels, and other record companies have followed suit.

The agreement is simple. The small label continues to seek out and promote new talent. But when a band proves a success, it can call on all of the major label's marketing and distribution clout to push into overseas markets. The large group gets some of the benefit of a major success, but isn't left with a duff band on its books when its popularity wanes.

"Basically, all the cool independent labels are bankrolled by the multinational conglomerates. They secure the copyrights but don't have to take on the overhead," says Mr Steemson.

In a market where growth is slowing and competition becoming ever more intense, that can be of great benefit to the big labels. In recent years, the global music industry has been slowing down as the one-off boom caused by people replacing their vinyl records with compact discs drops away.

While the world music market expanded by 17 per cent as recently as 1993, growth in the next few years is forecast at about 4 per cent a year. The Asian crisis, which has taken the steam out of one of the few parts of the world where music sales were still growing, has added to these pressures.

On top of this, music groups are facing an increasing threat from the Internet. Internet music retailers such as Music Boulevard are now selling CDs for as little as $12 - a large discount to retail prices in Europe. As Nick Ward, an analyst at Credit Lyonnais Laing, points out, this will eventually force music groupsto cut prices and squeeze margins.

All this means that large music groups need to be sure of success when they promote a band. Industry executives admit that the cost of promoting new bands means that their first album rarely makes money. The trick is to pick acts that will continue to be popular, thereby picking up lucrative profits on their second and third releases.

This is a complete change of fortune for the independent labels, many of which were swallowed up in a welter of consolidation in the late 1980s. That's when Island, the label which nurtured bands like U2, was taken over by PolyGram while Richard Branson sold his Virgin record label to EMI.

So the major and independent labels seem to made for each other. "The beauty is that we are seen as a place where bands can develop at their own pace," says Andy Saunders, head of communications at Creation. "Bands can work with a small team but then be marketed by a huge organisation."

However, the relationship is not free of tension. Large groups will regularly find themselves competing with smaller labels to sign acts. Sometimes the rivalry even extends to groups that normally work together.

What's more, the majors have to handle their relationship with smaller labels carefully. Sony recently tried to exercise an option it held to take full control of Creation. But when its founders made it clear they did not want to be part of a huge music conglomerate, Sony was forced to back down.

Still, the growing consolidation between the largest music groups could turn out to be good news for smaller labels. "The merger between Seagram and Polygram may look bad news for the independent sector," says Ajax Scott, editor of Music Business International, the industry bible. "But increased competition between the majors means they will invest more safely, leaving a niche for the independents."

Not all industry observers accept the status quo, however. Having already made one fortune setting up and selling a record label, Richard Branson recently set up another, calling it V2. His aim is to create a global music player from scratch, investing in offices and distribution facilities around the world. Observers are not yet sure whether his gamble will pay off. "They've had some success," says one industry insider. "But they have probably only got another two years to justify that level of investment."