Post

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

September 21, 2012

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.