UMG/EMI: The Next Innovation Bottleneck

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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.

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