Public Knowledge Testifies Against the Universal/EMI Merger

June 22, 2012 ,

Yesterday I watched PK President and CEO Gigi Sohn, among
others, testify in front of the Senate Judiciary Committee Subcommittee on
Antitrust, Competition Policy and Consumer Rights in a hearing
on “The Universal Music Group/EMI Merger and the Future of Online Music.” Seeing
the hearing in person was itself an achievement, as the line was already down
the hall and around the corner an hour and a half before the scheduled start.
Obviously, this is a subject people are interested in. PK, in particular, is
concerned that allowing the largest record company to absorb the fourth largest
would create a “super-major”
that would have too much control over methods of distribution and
would harm consumer access to music.

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.

The other major theme that emerged was a comparison to the
failed AT&T/T-Mobile merger. The parallels are obvious – two of the four
major competitors in an already-under-competitive industry combining to form
three. Mr. Grainge objected to this comparison, however, repeatedly claiming
that unlike AT&T, Universal does not have a direct paying relationship with
the consumer. Even if one accepts that Universal never distributes its own
products to consumers (although it does sell its services directly to
musicians), this ignores the important fact that antitrust regulation is about
market control, and just like AT&T/T-Mobile, an approved merger would
result in a company with a dramatically oversized share of the market,
resulting in reduced competition and consumer choice.

Those were only the most common of the themes that emerged during the
two-hour hearing. A few other highlights, though: UMG’s suggestion that
antitrust law doesn’t actually apply to the music industry, the argument over
whether record sales have suffered because of piracy or because of industry
price-fixing, the way the conversation always came back to how the merger would
affect Adele. I very much recommend that anyone interested in the topic watch
the video
or read the transcript when it becomes available online.