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Students of Antitrust law take note: a 4-3 merger of the smallest into the largest of the four biggest recording companies is underway. Universal Music Group is attempting to purchase EMI, the home of the Beatles. Universal Music Group is itself owned by Vivendi, a French company.
The EU, however, isn’t entirely thrilled with the deal. A 4-3 merger, or a merger that brings the number of competitors from 4 to 3, is going to draw the attention of antitrust regulators regardless. But the recording industry also has a rocky relationship with antitrust law. The Federal Trade Commission, the US Senate, and authorities in Canada and Australia are also taking a long look at the deal, while authorities in Japan have given it the okay.
The potential merger raises a couple of interesting issues. First, it highlights the complex network of regulations that an international corporation has to wade through to accomplish much of anything. If the deal is only okay’d in Japan, it still won’t go through. Of course, each regulator the companies have to face only tack on more money to the cost of the deal.
That’s the second interesting issue: Universal Music threw in a clause in the original deal to shoulder all the costs associated with regulation. I know we like to think of corporations as supremely rational actors, but surely they’d remember that (A) the recording industry has a history of price fixing and (B) Universal is the largest recording company and is buying the fourth largest. A plus B equals an expensive regulatory process.
You might ask yourself what the price fixing has to do with mergers. Obviously, if you merge all major companies in an industry into a single company, you have a monopoly that can exact monopoly rents without worry. Price fixing is an attempt to exact those rents without the monopoly label, and it is far easier with fewer players. Collusion is the ultimate game of chicken or, as popular among economists, prisoner’s dilemma. If companies A, B, and C are colluding to raise prices to the monopoly price, any one of these companies could stage a major market share coup simply by lowering prices to the competitive price. The incentives to cheat are high, so, for the price fixing scheme to work, there needs to be a level of trust between the companies. It’s easier to trust a few players.
This leads us to another aspect of price fixing jurisprudence here in the US: history. If you operate in an industry, like the tobacco industry, that has a history of monopolistic practices, courts are likely to believe that you find it easy to collude with your past conspirators. If your industry could do it once, it could do it again. The music recording industry, because there are only a few major players (those of us here in Nashville know there are independent studios every five feet, it seems, but we’re talking major market share) and because they’ve price fixed before, it is naturally going to draw a lot of attention from regulators.
So, it was odd that Universal Music agreed to shoulder all the regulation costs. Can Universal Music save the deal? The EU regulators want divestment. EMI comes with Virgin Records, its own acquisition from a few years ago, and Virgin Records appears to be the most likely divestiture. It’s a delicate dance: Universal Music doesn’t want to sell off the best assets or the deal will be less profitable (don’t let’s forget that odd clause). Of course, no deal in Europe is also fairly unattractive. And it’s too early in the process to know if anyone is interested in picking up Virgin Records or other EMI assets. Probably the Beatles are going to stay with the rest of EMI, though.
Finally, one of the reasons the EU is less than thrilled with the deal? They aren’t buying Universal Music’s argument that online piracy will police the industry for non-competitive prices. Are regulators beginning to get a handle on the complex economics of online piracy? All I can say is that the primary goal of antitrust law, at least here in the US, is consumer protection.
Until the rest of the world’s antitrust regulators weigh in on the deal, all Universal Music can say is “Money (That’s What I Want).”