Why is Universal Music Group, the music industry’s top player, planning on spending $1.9 billion to acquire EMI, if not to increase its market power and leverage over the growing digital-distribution market?
It was the salient question during Thursday’s Senate hearing on the proposed deal that would extend consolidation in the music industry from four leading players to three. But Sen. Herb Kohl, D-Wis., chairman of the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, could not get it answered.
Lucian Grainge, chairman and chief executive of Universal, and Roger Faxon, head of EMI, stuck to their main talking points: that it was in the interest of recording companies to make their music available on as many platforms as possible in order to maximize sales; that labels no longer act as gatekeepers between fans and music; and that Universal is a natural owner for EMI, which has been held over the past years by private-equity owners and most recently Citibank.
The subcommittee has no statutory authority over the merger, which is being reviewed by the Federal Trade Commission, making Thursday’s hearing something of a sideshow.
Kohl convened the panel in part to raise the question of digital dominance. The lack of oversight authority, combined with the recent marathon sessions devoted to the farm bill, might explain why subcommittee ranking member Mike Lee, R-Utah, was the only Republican to ask questions.
Merger opponents Edgar Bronfman Jr., former chairman and CEO and current board member of Warner Music, and Public Knowledge president Gigi Sohn countered that the merger would give the combined Universal-EMI so much market share that it would have the power to determine which digital-distribution platforms succeed or fail.
By most estimates, a combined Universal-EMI would control about 40 percent of the U.S. market for recorded music. At the same time, music-industry executives cite a diminution of overall music sales since 2001, ascribed variously to lower prices, the availability of singles, and lost sales due to rampant piracy. In this reinvented landscape, more than half of U.S. music sales take place over digital platforms, and 70 percent of digital sales belong to Apple’s iTunes platform.
Grainge tried to paint a picture of an industry that was just beginning to right itself after a decade of staggering losses. “Reinvention has not always been kind to us,” he said.
Bronfman, whose company tried unsuccessfully to acquire EMI, said that consolidation has the effect of reducing consumer choice, leading to a 30 percent to 40 percent reduction in artist rosters. Faxon didn’t dispute Bronfman’s history, but said that the Universal-EMI deal is less about introducing operating efficiencies than about finding a natural owner for EMI.
During his opening statement, Kohl fretted about possible consequences to consumer choice, saying, "We must be careful to ensure that this consolidation does not impede the ability of independent record labels to compete, or place undue barriers to the emergence of new, innovative, and diverse talent in the music industry."
The European Union earlier this week sent Universal a list of its regulatory concerns about the deal, which could lead to conditions being placed on the merger. The FTC is still weighing the merger, and is not expected to finish its investigation until September, according to sources close to the deal.
Consumer watchdog groups such as Public Knowledge and the Consumer Federation of America seek to scuttle the deal. But the groups more realistically hope that regulators will place conditions on the deal that give some pricing protection to companies that seek to license music from a combined Universal-EMI.