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TECHNOLOGY

Music Deals Could Transform Digital Market

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If Universal-EMI deal is approved, Universal would gain control over the legendary British company’s rich catalog of recorded music, which includes the Beatles. (AP Photo)

As the Justice Department presses forward with its lawsuit filed last week against Apple and two publishers for allegedly colluding to raise prices and manipulate the evolving market for digital books, the nation’s other antitrust regulator is weighing whether to approve a transaction that could dramatically impact the development of another digital market: music.

The Federal Trade Commission is examining two transactions that critics worry could hamper the growth of new digital-music platforms. Universal Music Group is seeking approval to buy EMI’s record label for $1.9 billion, while an investment group led by Sony is hoping to get a green light to purchase EMI’s music-publishing business for $2.2 billion.

 

If its deal is approved, Universal would gain control over the legendary British company’s rich catalog of recorded music, which includes the Beatles and Pink Floyd, while also picking up its roster of current musicians such as Coldplay, Norah Jones, and Katy Perry. Under the other deal, Sony would get the rights to more than a million musical compositions EMI holds, which include songs ranging from “Every Breath You Take,” made popular by the Police, to Motown hits such as "Heard It Through the Grapevine.”

Sony declined to comment on its transaction. But Universal Music Group spokesman Peter LoFrumento said his firm’s deal with EMI “will enhance the creative investment in the company and further broaden support for digital services. This will provide more music and more choice for consumers than ever before. Universal Music is the right home for EMI; first and foremost, we’re music people. It’s in our DNA.”

Both transactions must be approved by the FTC and the European Commission. The European Commission approved Sony’s bid for EMI last week. It announced last month that it had opened an “in-depth” investigation of the Universal-EMI deal, saying the merged companies would be “almost twice the size of the next largest player” in the EU. The FTC has not commented on its investigation of the EMI deals.

 

With its purchase of EMI’s music-publishing arm, Sony would gain the biggest share of music-publishing revenues. While critics have voiced concerns with both deals, they say they’re more worried about the Universal transaction, which would reduce the number of record labels from four to three. At the same time, Universal, which is already the nation’s biggest record label, would see its U.S. market share grow from about 31 percent to more than 40 percent, according to 2010 figures.

"One firm holding 43 percent of marquee content has the ability to adversely affect the development of digital distribution models,” Consumer Federation of America Director of Research Mark Cooper said.  “Absolutely, it’s bad for consumers.”

Warner, the nation’s third biggest record label, is opposing the deal. The company declined to comment on the transaction. However, during a conference call in February to discuss the company’s earnings, Warner Music Group CEO Steve Cooper warned, “If either of these transactions close, we … believe it would significantly impair the competitiveness of the recorded-music and music-publishing markets, harming consumers, industry employees, recording artists, songwriters, physical and digital retailers, and our emerging digital services.”

As sales of CDs continue to fall, record companies are becoming much more reliant on digital-distribution avenues such as iTunes, where consumers can download digital copies of music, or through subscription services that stream music, like Spotify, MOG, and Rdio.

 

Rivals and independent musicians worry that a much bigger Universal will be in a position to serve as a gatekeeper, dictating what new online-distribution models will emerge. New online-music services must still rely on the cooperation of the major labels that own the sound recordings of much of the most popular music and the music publishers that control the musical compositions, according to the consumer group Public Knowledge, which has criticized both transactions. The group argues that if Universal withholds access to its substantial catalog from a new online-music service, the service is unlikely to succeed.

“A company with that much market power will have tremendous influence over what types of innovations will come to the marketplace and what the licensing and access environment will be,” said Casey Rae-Hunter, deputy director of the Future of Music Coalition, which represents the interests of independent musical artists.

Rae-Hunter and other critics argue that the deal should be blocked under existing U.S. antitrust guidelines. Music-industry watchers, however, say the music industry is going through a major shift and that antitrust regulators will likely consider more than just market share in evaluating the transactions. They say record labels no longer hold the sway they once held. Many musicians are bypassing the major labels and signing with independent labels or choosing to market their music on their own online.

Mike McGuire, a music-industry analyst with the Gartner Group, said that while there are “valid” questions about the deal’s impact on consumers and whether Universal will be in a position to “throttle” digital distribution, the labels’ control over the music industry has “retracted.”

“In reality, there are a number of sources now for consumers to get music,” he said.

Howard University law professor Andrew Gavil said that the FTC will have to consider whether to “analyze it as if there are four big labels or is it a more complicated or nuanced analysis. I think it’s the latter. You can’t just go by traditional market share.”

At the same time, Gavil and others note that Universal and other labels are hardly in a position these days to dictate terms to major distributors, which for physical CDs include retail giants like Wal-Mart and for digital providers like iTunes. Apple’s online music store accounts for most of Universal’s digital revenues, according to sources close to the company. And given that online piracy of music remains a significant problem, it would hardly be in Universal’s interest to block new and legitimate ways of distributing its music online, Gavil added.

The record companies “have a lot of interest in channeling people into legal ways of getting music,” he said.

 

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