Despite a notorious history of ‘big player’ domination, concentration of ownership in recorded music reached a peak Friday, September 12, 2012, when the Federal Trade Commission (FTC) approved the merger of Universal Music Group (“Universal”) and EMI Recorded Music (“EMI”).  Despite the FTC’s finding that the merger will not substantially lessen competition in the recorded music market, opponents to the ruling, including consumer groups and smaller music labels, point to the market shares of both corporations as overwhelming evidence to the contrary.

In evaluating the merger’s potential antitrust threats, one of the key issues was selecting the appropriate market to evaluate Universal’s future market power.  If commercial recorded music as a whole was the FTC’s market selection, ownership breakdowns provide reasonable cause for concern.  Prior to the FTC’s ruling, Universal and Sony each owned 30% of the recorded music market, while Warner Music owned 20% and EMI owned 10% of the market.  Following the FTC’s merger authorization–Universal now owns 40% of the recorded music market, while a mere three companies own 90% of the entire music market.

Considering the limited number of players in recorded music, how did the FTC find that there was “limited direct competition” between Universal and EMI to justify their merger?  Instead of classifying the affected market as commercial recorded music as a whole, the FTC chose to segregate the industry into individual markets.  In its evaluation, the FTC looked to the content of both music distributors’ portfolios to find sufficient disparity in content to remove any threat to market competition.  The FTC found that Universal was most prominent in new releases, including work by Lady Gaga, Rihanna, and Justin Bieber.  EMI’s recorded music portfolio, however, consisted primarily of older titles by artists such as Pink Floyd, Tina Turner, and Duran Duran.  Thus, the FTC perceived no threat to competition in the particular markets.

The FTC’s logic seems to make sense, considering that a consumer of Rihanna tracks is unlikely to be affected by a surge in prices for Pink Floyd collectors’ sets.  But opposition to the merger transcends genre distinctions and focuses on the precarious situation that digital music service providers are now facing.  Opponents to the Universal/EMI merger do not limit the potentially afflicted market to commercial recorded music, but raise concern over looming barriers to innovation and market competition in digital distribution services.  According to Jodie Griffin, an attorney with Public Knowledge, an Internet freedom advocacy group, the merger provides Universal with unprecedented leverage over digital streaming service providers in all future licensing agreements.  While digital music providers were once able to negotiate with major labels, ranging from 10% to 30% ownership of the recorded music catalogue, they will now be faced with two options: fail to provide 40% of recorded music to their consumers, or bend to the will of Universal.  Given Universal’s preexisting dominance in recorded music, does their acquisition of EMI truly create a new threat to the digital distribution of music?

The FTC apparently failed to appreciate opponents’ arguments, but the same cannot be said for European Union (EU) regulators.  While the EU approved the deal between Universal and EMI, they forced Universal to sell much of EMI’s European catalog, including its Parlophone label, which included artists such as Coldplay and David Bowie.  However, Universal acquired, and was permitted to keep, the crown jewel of the EMI European collection–The Beatles Catalogue.

– Kate Haywood

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One Response to With a Little Help from My Friends… at the FTC

  1. Niels Melius says:

    Very interesting topic. I wonder if the FTC’s acquiescence to the merger had more to do with a factor this article didn’t emphasize: the power of iTunes. Critics of the merger seem to focus on the potential monopoly/market power of a combined UMG/EMI as a supplier of recorded music. But this focus ignores the potential “monopsony” power of Apple as a power buyer of recorded music (via its iTunes service). Indeed, the Forbes article cited quotes the CEO of Universal testifying to the power of Apple: “If Apple stops selling our music, we go out of business. Apple does not.” So perhaps digital music providers aren’t the victims here after all. Instead, maybe the FTC was worried about a “power buyer” in the digital music market and saw the procompetitive benefits of a UGM/EMI merger as a potential counterweight to iTunes.