An EMI merger may go easily

[17 August 2011]

By Alex Pham

Los Angeles Times (MCT)

LOS ANGELES — Reducing the number of major players in the music industry from four to three would, ordinarily, sound alarms among antitrust regulators, especially if those companies account for roughly 75 percent of the music business.

But the possibility that storied music label EMI Group will be gobbled up by Universal Music Group, Sony Music Entertainment or Warner Music Group is not likely to generate much heat from regulators, even though it would reduce the landscape to three dominant companies, down from six in the late 1990s, antitrust experts say.

That’s because music labels don’t have the clout they used to, given how much the industry has morphed in the past decade. In particular, digital channels have weakened the record companies’ grip on the market, giving rise to newly powerful online retailers such as Apple Inc.‘s iTunes and Amazon.com Inc. Musicians also are less beholden to record labels when it comes to marketing and selling their songs, thanks to social media and online commerce.

“In a different era, a merger between any of those companies would raise major red flags at the antitrust divisions” of the U.S. Federal Trade Commission and the Justice Department, which police antitrust matters, said Mark Lemley, an antitrust law professor at Stanford Law School. “But things have changed. There are new sources of competition in the digital environment, and the dominance of the four majors has been reduced.”

That lessens, but by no means eliminates, the likelihood that a sale of EMI — whose roster includes Katy Perry, Pink Floyd and Willie Nelson — would be opposed by antitrust officials in Europe and the U.S., analysts said.

Citigroup Inc., which took over EMI in February after the company’s previous owner, Terra Firma Capital Partners, proved unable to repay a $5.4 billion loan, is evaluating the first round of bids and is expected to narrow the field this fall, according to people familiar with the process, who requested anonymity because of the confidentiality of the negotiations. EMI has 10 percent of the recorded music business and nearly 20 percent of the publishing business worldwide, according to Music & Copyright, a newsletter published by British research firm Informa.

Regulators are broadly concerned with two factors: market power and the ability to collude, said Michael Cohen, an antitrust litigator with Paul Hastings Janofsky & Walker in Washington, D.C.

“Is the merged firm going to have power to, for example, dictate prices that the two don’t have independently today?” Cohen said. “And will the merger result in an environment that makes it easier for the remaining firms to get together to collude?”

Music companies have gotten into hot water before on pricing matters. In 2002, the labels agreed to pay $67.7 million to settle lawsuits filed by several states’ attorneys general who alleged that the companies kept CD prices artificially high by getting retailers to agree to minimum prices. In 2003, the FTC said Vivendi Universal and Warner violated antitrust laws by agreeing to curb discounting of the Three Tenors’ records.

Today, however, companies such as Apple and Amazon are more apt to discount music to compete with one another. One example is Amazon’s recent decision to sell Lady Gaga’s “Born This Way” album for 99 cents.

The ability to set prices is a classic consideration. But, increasingly, regulators have voiced concern about the power to stifle technological innovation. The danger is that firms with too much influence can squash start-up companies that innovate, Lemley said.

“When digital music came online, you could argue that the majors were acting in lock-step with respect to which new technology companies they would or would not work with,” said Lemley, citing music companies’ refusal to license their music to Google Inc. and Amazon, each of which were seeking to launch services that would let consumers listen to songs they’ve bought online.

“I don’t think that’s necessarily a healthy thing when you have entities that are able to control how new services enter the market,” said Charles Caldas, chief executive of Merlin, a British group that represents independent labels. “What the industry needs is new innovative business models that drive value.”

But innovation is not explicitly written into the law, said Reed Hundt, an antitrust attorney and former Federal Communications Commission chairman.

“The emphasis on innovation as a goal for our economy is fairly new,” Hundt said. As a result, preserving innovation could be a more important factor if a merger is reviewed by the Federal Trade Commission, whose chairman, Jon Leibowitz, has held hearings and issued a report on patent policy and innovation. A merger could also be reviewed by the Justice Department, whose acting antitrust chief, Sharis Pozen, has not publicly stated her views on the topic.

The other area where market power matters is with respect to musicians, Cohen said.

“The question here is whether an artist could not write a song, perform it and have it distributed and sold without the help of a record label,” he said. “In the past, the answer was no. Today, the answer is yes.”

Startups such as TopSpin, ReverbNation and TuneCore enable bands to circumvent record labels and directly sell to their fans. In recent years, established artists, including Radiohead, Paul McCartney and Nine Inch Nails, have dropped their contracts with major labels and opted for alternative distributors.

Further watering down the power of major music conglomerates is the proliferation of free music, both via legal online radio services such as Pandora and via illegal sources such as file-sharing sites.

“Changes in the competitive landscape brought in by technology in the past decade means that any regulatory review is likely to be about more than just adding up market share numbers,” said Scott Martin, an antitrust attorney at Greenberg Traurig. “Consumers simply have a lot more choice now than they have before.”

Published at: http://www.popmatters.com/pm/article/146305-an-emi-merger-may-go-easily/