Universal Music Buying EMI – An Anti-Trust Concern?

Universal Music Buying EMI – An Anti-Trust Concern?

Universal Music is trying to convince anti-trust regulators that buying EMI does not create anti-competitive concerns. Critics argue that having 41% control of the music market (ala ‘super-label’) is cause for concern for competitiveness in the market. It is all part of a debate being held before US law-makers.

The idea of a major record label buying EMI isn’t exactly new. For years, EMI seemed to be either in talks of being sold or seemingly about to be sold. Warner Music Group was one of the record labels trying to buy EMI in the past, but now it seems to be Universals turn to convince regulators that they should be allowed to buy EMI. As before, should the deal be permitted to proceed, the “big four” could become the “big three”.

Public Knowledge testified against the merger of UMG and EMI. From the blog posting:

The witnesses testifying in favor of the merger, Lucian Grainge, CEO of Universal; Roger C. Faxon, CEO of EMI; and Irving L. Azoff , CEO of Live Nation Entertainment, all focused on arguing that the current music industry environment is highly competitive and that the Internet creates many opportunities for emerging artists.

The witnesses opposing the merger, Edgar Bronfman, Jr., of Warner Music, Martin Mills of Beggars Group, and Gigi Sohn, pointed out that this argument is a deflection from the actual matter at issue, which is that a merger between Universal and EMI would result in a music industry superpower that would control 42% of the market and 51% of last year’s Billboard Top 100, and that such a superpower would have the ability to act as a gatekeeper for any new distribution service hoping to enter the market. Mills, additionally, disputed the idea that the Internet and digital content create a highly competitive market. He noted that although independent labels control 30% of the market, the major labels still control the distribution rights for two thirds of that 30%.

It wasn’t until Senator Franken asked Grainge directly that any of the proponents of the merger actually addressed the potential for such a significant market share to create an incentive to demand more in negotiations. Grainge argued that the record labels would always want to engage with different technologies because it is in their interest to create opportunities for people to purchase their music. He brought this argument up several more times throughout the hearing: if Universal doesn’t engage with every potential outlet, digital or otherwise, its artists will suffer and leave, its sales will drop, and it will end up going out of business.

However, as Gigi then pointed out, Universal hasn’t actually been doing that. Universal has a long history of not only neglecting alternative services but actively fighting them. Universal has sued online services Deezer, Vevo and Grooveshark; its licensing demands for the Zune were excessive, insisting on a royalty for every player sold; and it was the third of the four companies to sign with Spotify and Google Music. Its actions clearly belie any claim that it would happily engage with digital distribution services without pressures from the other labels. When directly confronted with these examples, Grainge’s only response was to repeat his contention that Universal would have to be crazy not to license its music on as many platforms as possible. Apparently, Grainge believes his company has been making terrible business decisions for years. And although proponents of the merger were quick to note that digital technology makes artists less dependent on labels as an argument that the merger would not make the resulting company too powerful, they were unwilling to admit that this also gives them an incentive not to adopt the technology.

Reuters noted that Universal rolled out all the star power it could use to try and get approval:

Universal Music Group is trotting out a roster of big-name allies as it makes its case on Thursday before U.S. lawmakers for its much-criticized deal to buy a chunk of rival EMI.

Irving Azoff, the head of Live Nation Entertainment, which faced its own regulatory rough ride in its controversial merger with Ticketmaster in 2010, plans to tell a congressional hearing that increased competition in digital music will make the mega-music merger less concerning.

“With services like iTunes, CD Baby, Top Spin, Reverb Nation, Pro Tools, Facebook, Spotify – you name it – artists can do everything themselves very professionally,” he said in written testimony prepared for the Senate Judiciary Committee’s antitrust subcommittee.

Universal, owned by Paris-based Vivendi, is also using its in-house star power to woo lawmakers.

Variety added that one of the arguments for the deal was the fact that New Zealand regulators gave the green light for such a deal:

The UMG-EMI hearing, chaired by Sen. Herb Kohl (D-WI), unfolded hours after UMG announced that the New Zealand Commerce Commission had become the first regulatory body to approve the deal.

UMG said in a statement, “The NZCC undertook a very thorough investigative process… We continue to work with regulators in other jurisdictions, and remain confident of further clearances.”

On Tuesday, UMG acknowledged that the European Commission had lodged a statement of objections to the purchase (Daily Variety, June 20). The Federal Trade Commission is reviewing the acquisition here.

Forbes lashed out at critics of the deal, saying that those who criticize the merger are merely conspiracy theorists that are so paranoid, they would make JFK assassination conspiracy theorists blush:

Everyone loves to hate record labels. For years, copyright-bashers have ranted about the “Big Labels” trying to thwart new models for distributing music in terms that would make JFK assassination conspiracy theorists blush. Now they’ve turned their sites on the pending merger between Universal Music Group and EMI, insisting the deal would be bad for consumers. There’s even a Senate Antitrust Subcommittee hearing tomorrow, led by Senator Herb “Big is Bad” Kohl.

But this is a merger users of Spotify, Apple’s iTunes and the wide range of other digital services ought to love. UMG has done more than any other label to support the growth of such services, cutting licensing deals with hundreds of distribution outlets—often well before other labels. Piracy has been a significant concern for the industry, and UMG seems to recognize that only “easy” can compete with “free.” The company has embraced the reality that music distribution paradigms are changing rapidly to keep up with consumer demand. So why are groups like Public Knowledge opposing the merger?

Critics contend that the merger will elevate UMG’s already substantial market share and “give it the power to distort or even determine the fate of digital distribution models.” For these critics, the only record labels that matter are the four majors, and four is simply better than three. But this assessment hews to the outmoded, “big is bad” structural analysis that has been consistently demolished by economists since the 1970s. Instead, the relevant touchstone for all merger analysis is whether the merger would give the merged firm a new incentive and ability to engage in anticompetitive conduct. But there’s nothing UMG can do with EMI’s catalogue under its control that it can’t do now. If anything, UMG’s ownership of EMI should accelerate the availability of digitally distributed music.

CIO also added some comments made by critics:

“Will Universal’s music catalog be so large as to make it a gatekeeper that can make or break any new online service and allow it to prevent new competitively priced services from launching?” Kohl challenged. “In almost all industries, reducing the number of competitors from four to three expands the market power of the remaining companies and increases the risk of higher prices. Why shouldn’t these same principles apply to the music business?”

Some opponents of the transaction see a parallel with AT&T’s failed bid to purchase T-Mobile. The wireless market is similarly dominated by four major players, thus raising concerns of undue market concentration when one proposes to acquire another.

So while Grainge and Faxon tried to tamp down the notion that the combined entity would be able to pick winners and losers among digital music services, and effectively dictate the licensing terms of its partnerships, critics warned that the departure of EMI from the marketplace would remove an important competitive force.

“If this merger’s allowed, consumers and artists will be the losers,” said Gigi Sohn, president of the digital-rights group Public Knowledge. “Removing a maverick competitor like EMI from the market will ensure that the remaining three players obtain more control over the future of online music.”

Personally, I have to side with Public Knowledge on this one. Many have already accused the industry, and with good reason, of being anti-competitive. Just looking at the behavior of the major labels when it comes to the Internet, it’s easy to see how and where the labels practically behave in the exact same way. For instance, just look at the handling of file-sharing litigation.

Another thought I have is that if there’s no concern whatsoever about competition in the market place, why do the labels have to convince so many regulators from so many different countries that, “don’t worry, everything is cool in the market if we go through with this deal!”?

It also strikes me as hilarious that Universal is claiming that they are innovative in today’s digital marketplace and that, don’t worry, in spite of their activities in the past, they’ll be on their best behavior and be innovative instead. The comment about lowering prices and increasing consumer access also strikes me as amusing given that clear back in 2002, the RIAA was sued for price fixing – a case where the RIAA ended up settling to make the case go away. That was with the big four record labels in the market.

What my concern would be is that if the deal ultimately does go ahead, what’s to stop Warner and Sony from merging in an effort to stay competitive? Would we eventually end up with a two record label marketplace?

Just look at the rough statistics mentioned by Reuters:

Universal is the biggest music company at 30 percent of the U.S. market, Sony is second at about 29 percent, Warner third at 19 percent and EMI at 10 percent, according to 2011 data from Nielsen SoundScan.

I don’t think I’d be real comfortable with the idea of roughly 88% of the entire music industry being controlled by two record labels to be honest. Things are bad enough with only four now. I can only imagine how much worse things would be with only three big labels left in the market.

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