OMG, UMG! Why Four Major Labels Are Better Than Three.

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Right now the biggest record label in the world, Universal Music Group, is attempting to buy the fourth-largest record label, EMI, a move that could stifle the development of new digital music services to the detriment of musicians and their fans. If one company holds a large enough share of the recorded music market, new online music services will inevitable need to curry favor with that company in order to succeed, which gives that company (here, Universal) effective veto power over new services and competitors.

Today Public Knowledge and the Media Access Project filed a letter advising the Federal Trade Commission to investigate thoroughly how the proposed transaction will affect both artists and audiences before it lets the one of the “Big Four” major labels take over another. While we are not currently asking the FTC to necessarily block the deals outright, the deals pose some serious potential harms to musicians and consumers. The FTC should rigorously review the likelihood and scale of those harms before it decides whether it should approve the acquisitions in their current form.

In its review, the FTC will assess the Universal’s bid under antitrust law with an eye toward promoting and protecting competition. As part of that review, the FTC should consider how the merger could impede investment, innovation, and competition, and its subsequence effects upon the development of music distribution and other services that ultimately benefit musicians and their fans everywhere.

The advent of digital music services was a boon to both musicians and audiences, offering new opportunities for artists to create, promote, distribute, and monetize their works. New development and distribution services empower musicians to choose how they will shape their careers and help musicians be more responsive to audience demand for their work.

Musicians may still choose a more traditional, transaction-based outreach and distribution model, or they may choose to build deeper relationships with their fans. Each strategy presents different advantages and challenges, and the right choice will depend upon the unique position of each individual artist. By giving musicians more options, digital music services increase musicians’ ability to craft artistically and financially successful career models. And empowering musicians benefits audiences, who enjoy new ways to access, experience, and interact with music.

These new music services, however, often rely upon licenses from the sound recording copyright owners: record labels. EMI Music itself has launched a project called OpenEMI, which allows developers to access parts of the EMI Music catalog to develop new applications to distribute music. Although these examples are more limited in content scope, any digital music service that depends upon a music library of substantial breadth and depth, such as Spotify or the iTunes music store, will fail if it cannot offer a critical mass of popular music to consumers. The success of these outlets will affect other distribution platform developers as well as consumers looking for easy, reasonable access to music. For example, this past November, Spotify announced that it would be granting developers access to its music library by way of an app framework. In theory, now anyone can create an app that uses all of the songs that Spotify currently offers.

As audience demand currently turns to a streaming, cloud-based model, new distribution services will have trouble launching without a major label willing to be the first to grant licenses, and ultimately may never succeed if a single major label can withhold 40% of the recorded music market even after other labels have started working with the service.

Even in today’s marketplace a major label can wield sufficient power to demand that potential new digital music services pay the label hefty advances and a high percentage of future revenue, or give the record label an equity stake in the new company. A combined Universal/EMI entity (holding a hefty combined 41% market share) would only be able to exert even more control over new music services.

Competition among production and distribution intermediaries in the music industry ultimately gives more choice to musicians and leads to better market offerings for their fans. Competition among distributors increases the diversity of choices for consumers, empowering consumers to choose the services that best fit their needs at the best price. If one or two major labels obtain enough influence to stifle the development of new digital music services, those services never will be able to gain traction in the marketplace, and potential competitors will fail, not on their merits but based on the service’s inability to strike a deal with an inordinately powerful supplier. As a result, both musicians and audiences will suffer for lack of innovative competitors in the online music service marketplace.

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