UMG & EMI Will Merge, Music Biz Gatekeepers Are Here To Stay

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Today the European Commission and US Federal Trade Commission (FTC) both gave clearance to the merger of major record labels Universal Music Group (UMG) and EMI. The European antitrust authorities conditioned their approval on a number of divestitures, but the FTC simply closed their investigation without taking any action or negotiating any conditions on the merger. On the whole, this is a major loss for the future of the music industry, and digital music services will be bearing the burden of this decision for years to come.

In Europe, the European Commission (EC) conditioned their approval of the merger on a number of conditions, mostly requiring UMG to sell off parts of EMI. The EC concluded, unsurprisingly, that size matters in licensing negotiations: a larger copyright holder has more leverage to extract “onerous licensing terms” from digital music services. So, when UMG gets bigger, it will be able to impose much larger costs on digital services, especially innovative new platforms that help distribute music in novel ways. The EC also expressed concern that new services would not be able to survive without a license from the post-merger UMG, and noted that piracy could not stop UMG from throwing its weight around.

Concessions in Europe; None in the US

So, the EC required UMG to divest a number of EMI sub-labels, including Parlophone (except for the very valuable Beatles catalog), Chrysalis, Mute, Virgin Classics, and 10 labels specific to European countries (EMI Norway, for example). It’s important to remember here that Europe was looking at labels that could have an impact in market shares in Europe, not the US. EMI Czech Republic may be an important player in the Czech Republic, but its market share in the US is relatively small. So, while these divestitures include worldwide rights relevant labels, these labels were chosen by the EC to protect competition in Europe, not in the US.

The EC also prohibited UMG from including “most favored nation” clauses in its contracts with digital music services, but only in Europe. Most favored nation clauses require the digital music service to offer UMG terms that are at least as good as any terms it has negotiated with another record label, adding an additional burden to a service trying to obtain licenses from multiple labels. Removing these terms from digital distribution contracts is a good start at leveling the playing field between behemoth major labels and innovative new startups. Unfortunately, the EC only prohibited these clauses in Europe, and the FTC took no action to also prohibit them in the US.

The Bottom Line: The US Wrongly Relies on Europe to Protect US Consumers

The real disappointment here is that the FTC took absolutely no action to protect competition in the US. The FTC noted that the European conditions may have some incidental benefit for the US market, but those are far from adequate when it comes to protecting competition in the US.

The conditions in Europe, even if they had been replicated in the US, would not have been enough to protect consumers and artists in the US. This is not surprising: those conditions were designed with the European markets in mind, and so they will have only a very small incidental benefit for US competition.

Going forward, digital music services in the US must prepare to fight an even tougher battle to launch innovative, consumer- and artist-friendly services in the US. For years now some in the music industry have predicted that the major labels are becoming obsolete, but UMG has clearly recognized that even if it doesn’t stay relevant in today’s market by adapting to changing technology and consumer demands, it can maintain its position in the marketplace simply by consolidating gatekeeper power over the businesses that are trying to move the music industry forward. Why earn relevance when you can buy it?

This decision by the FTC bodes ill for the foreseeable future of the digital music business. The FTC has enabled the dominant gatekeeper to further entrench itself between musicians and their fans, now with even less competition to pressure UMG to be fair to either.

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