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UMG/EMI: The Next Innovation Bottleneck

August 15, 2012 , , , ,

While much attention has focused on whether
European antitrust regulators will allow the major label Universal to buy one
of its competitors, EMI, the proposed merger has also attracted the attention
of US antitrust authorities in the Federal Trade Commission (FTC) and Senate.
In the US context, this merger bears some important similarities to recent
proceedings like the Comcast/NBCU merger and the failed AT&T/T-Mobile
merger.

Universal/EMI
and AT&T/T-Mobile: Taking Over a Maverick Competitor

Just like AT&T’s attempted takeover of
T-Mobile, which Public Knowledge opposed and which fell apart after meeting
opposition from the Department of Justice (DOJ) and Federal Communications Commission
(FCC), the UMG/EMI merger would bring the number of major competitors in the
market from 4 to 3, and would result in one company controlling 40% of the
market. Just as the DOJ and FCC recognized for AT&T/T-Mobile, this kind of
market share would result in higher prices and fewer choices for
consumers. 

The UMG/EMI and AT&T/T-Mobile mergers have
another important aspect in common: both threaten (or threatened) to eliminate
a maverick competitor that puts unique pressure on the dominant companies by
experimenting with new consumer-friendly initiatives and pricing models. EMI
and T-Mobile are both the fourth-largest companies in their respective markets,
which means they have to be uniquely innovative to compete against their much
larger competitors.

Time and time again, EMI has set the bar
higher for other major labels by taking risks on digital music services that
ultimately benefitted consumers.

For example, in 2000, EMI became the first
major label to license its catalog to the online subscription streaming service
Streamwaves, and in 2001 EMI became the first label to license to a digital
music service (PressPlay) without demanding an ownership stake.

In 2007, EMI became the first major label to
offer digital downloads through iTunes without digital locks on the files. EMI
has also been one of the first labels to sign deals with Spotify, Project
Playlist, and Apple’s iTunes Match. 

Finally, EMI is the first and only major label
to dive headfirst into developing digital music services by allowing app
developers API access to parts of the EMI catalog. The project, called OpenEMI,
offers a transparent 40/60 profit split to developers and does not require
developers to pay advance royalties or flat fees. More importantly, OpenEMI
shows that EMI is envisioning and embracing a new role for record labels: as a
liaison between developers and recording artists.

Universal/EMI
and Comcast/NBCU: “Conditions” Aren’t Perfect

The proposed Universal/EMI merger also reminds
us of when Comcast bought NBCU, subject to many conditions designed to stop
Comcast from using its gatekeeper power to stifle competition in new areas like
online video. There, the FCC and DOJ recognized that controlling must-have
content that new online services will want to license gives dominant companies
the ability to withhold licenses or extract terms that harm unaffiliated
programming and distribution competitors.

The story of Comcast/NBCU should also be a
cautionary tale if antitrust authorities try to prevent a post-merger UMG from
acting anticompetitively through behavioral conditions. Comcast has been
accused of violating its merger conditions several times, by companies like
Bloomberg and Concord and public interest organizations like Public Knowledge.
The proceedings investigating these complaints are still ongoing at the FCC,
and can be very expensive for competitors trying to speak out that they are not
being treated fairly. Similarly, the antitrust authorities must remember that
allowing UMG to buy EMI subject to behavioral conditions can impose significant
costs on those bringing complaints and the agencies that must investigate those
complaints.

Creating
a Bottleneck for New, Innovative Services

The AT&T/T-Mobile and Comcast/NBCU
proceedings also bear another striking similarity to UMG/EMI: they all threaten
a huge impact on companies and services that either don’t yet exist or might
not speak out against the merger for fear of retaliation. For example, an
existing digital music service that depends on licenses from major labels to
survive could very well see how a combined UMG/EMI would have even more
leverage over it, but might not want to oppose the merger for fear that UMG,
EMI, or a combined UMG/EMI would retaliate by withholding licenses or demanding
onerous terms.

Although digital music services might be
reluctant to call out UMG by name for fear of retaliation, we can still see the
likely effects of the merger by observing how digital music services depend on
licenses now. For example, digital music service wahwah.fm just
recently closed its service, citing licensing problems as a major obstacle to
maintaining a viable service that lets users choose what music they listen to.
Similarly, music streaming site Deezer continues to expand into new countries
 (three more just this week), but can’t get sustainable licenses to launch
in the US.

Past experience in the AT&T/T-Mobile and
Comcast/NBCU proceedings shed light on how dangerous the UMG/EMI merger would
be to consumers and a healthy competitive market for recorded music. This is
why the antitrust regulators must seriously consider the many consequences of
handing bottleneck control of 40% of the recorded music market to one incumbent
firm with a strong incentive to stifle competition.