Critics say digital music will suffer if Universal acquires EMI

Supporters of Universal Music Group's proposed acquisition of rival label EMI's recorded music division found themselves on the defensive at a Senate hearing on Thursday as they squared off against critics who warned that the combined entity would be large enough to effectively dictate the terms of music distribution in the digital age.

Senate Judiciary Committee holds hearing on Universal Music Group/EMI Merger

In testimony before the Senate Judiciary Committee's subcommittee on antitrust, the heads of Universal Music Group (UMG) and EMI Group cited the growing number of independent labels and the proliferation of online distribution platforms to argue that were their two companies to join forces, reducing the number of major labels from three to four, the impact on the market would be minimal.

"Digital has lowered the barriers to entry," said Lucian Grainge, chairman and CEO of UMG, a subsidiary of the French conglomerate Vivendi. "Technology and the Internet have enabled anyone to create music, market music and distribute music."

Roger Faxon, CEO of EMI Group, similarly argued that the power of the major labels is vastly diminished in an age when unknown acts can go viral online and fans are more directly involved with distribution than ever before.

"It's the music that matters, not the source," Faxon told lawmakers. "If there ever were antitrust issues implicated with label consolidation it seems to me they're not present today."

Once the relevant market is defined, a key concern in the antitrust review of a merger turns on whether the principal actor would wield market power sufficient to stifle competition, potentially resulting in harmful effects for consumers such as higher prices and fewer choices. Arguing that the Internet has disintermediated the record labels, supporters of the acquisition contend that the emergence of digital channels available to artists and consumers alike has effectively ended the era of top-down music distribution.

But that argument rings hollow to critics who point out that more than half of the Billboard Hot 100 songs of 2011 came from artists associated with UMG or EMI, and that independent labels, while growing in number, are still a footnote measured against the majors.

"Don't believe them when they say market share is not market power," said Martin Mills, founder and chairman of Beggars Group, a management firm overseeing independent labels. "Market power is why they're doing this," he added, terming Grainge and Faxon "monopolists."

UMG's proposed $1.9 billion acquisition of EMI is currently under review at the Federal Trade Commission and the European Commission.

At Thursday's hearing, lawmakers considered the proposed acquisition in the context of the rapidly evolving digital music space, where startup ventures such as Spotify look to reach licensing agreements with the major labels to flesh out their online catalogs in a bid to offer consumers alternative choices to discover and, potentially, purchase music.

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Grainge was adamant that UMG is committed to expanding the digital channel, noting that the label has signed more than 100 partnerships with online music ventures in the United States, and hundreds more globally. Any effort to foreclose on digital distribution would amount to "commercial suicide," he said.

"From my experience and where I sit, we would be insane not to license, develop, make our music available through as many platforms, through as many retailers, as possible," Grainge said.

But skeptics of the transaction, including subcommittee chairman Herb Kohl (D-Wis.), raised concerns about the share of the market for music sales the combined entity would wield, which by some estimates would be more than 40 percent. For Kohl, a long-time antitrust hawk, that prospect raises significant concerns about dominant market power.

"Will Universal's music catalog be so large as to make it a gatekeeper that can make or break any new online service and allow it to prevent new competitively priced services from launching?" Kohl challenged. "In almost all industries, reducing the number of competitors from four to three expands the market power of the remaining companies and increases the risk of higher prices. Why shouldn't these same principles apply to the music business?"

Some opponents of the transaction see a parallel with AT&T's failed bid to purchase T-Mobile. The wireless market is similarly dominated by four major players, thus raising concerns of undue market concentration when one proposes to acquire another.

So while Grainge and Faxon tried to tamp down the notion that the combined entity would be able to pick winners and losers among digital music services, and effectively dictate the licensing terms of its partnerships, critics warned that the departure of EMI from the marketplace would remove an important competitive force.

"If this merger's allowed, consumers and artists will be the losers," said Gigi Sohn, president of the digital-rights group Public Knowledge. "Removing a maverick competitor like EMI from the market will ensure that the remaining three players obtain more control over the future of online music."

Kenneth Corbin is a Washington, D.C.-based writer who covers government and regulatory issues for CIO.com.

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