Last week's Senate hearing examining the Universal Music Group's pending acquisition of EMI's recorded-music division has fostered no small amount of conversation, opinion and commentary, and we're happy to host all three on our site. Following Irving Azoff's Q&A from Friday and Ed Christman's take on the hearings published yesterday, here is a post from David Balto, a former policy director of the FTC and a lawyer in private practice who acted as an advisor to UMG in its proposed acquisition of EMI. His views do not represent those of Billboard or its staff; Billboard.biz welcomes responsible commentary.
With much fanfare on Thursday the Senate Subcommittee on Antitrust, Competition Policy, and Consumer Rights held a hearing titled "The Universal Music Group-EMI Merger and the Future of Online Music." The opponents of the merger brought out their media machine in full, ready to proclaim the demise of online music and untold tales of harm to consumers. But when it came time for details about the actual future of online music, all that could be heard was the proverbial "Sound of Silence."
Gigi Sohn, president of Public Knowledge, sent the audience off in the wrong direction with a curious market share demonstrative. With a visual aid of the current Top 100 hits propped behind her, Sohn had her assistant cover the titles owned by Universal and EMI to reveal that only half the songs were left.
Don't worry--neither did the onlookers who realized that, since precisely four major labels exist today, removing two labels from a list of 100 songs would naturally leave about half the songs.
What exactly the Top 100 hits chart meant is still a mystery. Few industries have been as scrutinized by antitrust cops as music, yet no court or regulatory commission in the United States or Europe has ever used a Top 100-type list in their market definition. And this is for good reason; a Top 100 list is ever-changing and completely ignores the influence, importance, and increasing revenues of independent labels.
The second critic was Edgar Bronfman, director of Warner Music Group. There is of course some irony in his mere presence at this hearing. This is an individual who has spent a decade attempting to acquire EMI for Warner. Like many jilted suitors Warner would like to change the rules of the game and get the antitrust cops to force EMI into a shotgun marriage. But that's not what the antitrust laws are for.
As Justice Brennan (the Elvis Presley of antitrust) instructed 50 years ago, the purpose of the antitrust laws is to protect competition, not competitors.
Mr. Bronfman at least identified the right question, how would the merger impact digital music. But the reality is that the consumer is the king when it comes to digital music. Consumer demand for digital music is so great it seems implausible than any label can prevent the emergence of the next great alternative.
A merger can only be challenged under the antitrust laws if it makes the market worse. The question is not whether Universal can block any new digital service alternative, it's whether an independent EMI is keeping the market honest.
And to that question the answer is an unequivocal no.
Much to Mr. Bronfman's chagrin, the hearing also brought to light that Warner-not Universal-was the last to strike a deal in the creation of Spotify (and has yet to license Google Music as well).
And as far as the future of Spotify and the sequential negotiations required for the next big platform, those creating nightmare scenarios about Universal-EMI might rest easy as of yesterday.
Tech giant Sean Parker - a Spotify board member who should know a thing or two about music in the digital era - has come out in support of the Universal-EMI merger. This is no surprise since it was Universal, not Warner, which was among the earliest supporters of Spotify when it first launched overseas.
The last refuge for the critics is the supposed 40% market share for Universal/EMI. From an antitrust perspective, it's simply an inflated figure that undermines an honest antitrust analysis. This 40% market share calculation is a gross figure that makes no sense to use because it unfairly includes independent labels that Universal only distributes, but does not manage or have any say in business decisions.
But even if it is correct it hardly moves the ball in a court of law. Just two months ago the FTC was faced with a merger in the complex pharmaceutical benefit management market that created a firm with over a 40% market share. But the FTC chose not to go to court because the two firms did not take a significant amount of sales from each other. The same is clearly true for record labels.
Sohn correctly stated that an antitrust analysis is "not about market share but about market power," but then fell very short in describing what the market power would be.
It would be hard to say what kind of power labels have in today's music world. For the bigbox retailers who dominate physical music sales, CDs account for a tiny portion of revenues. Walmart can easily set the terms or shift floor space to other merchandise. And with digital sales now accounting for more than 50% of the market and growing, there are no limits on how much music can be stored, sold or streamed online.
The critics have a view of the market that reached its sell-by date ten years ago.
As EMI's CEO Roger Faxon summed it up, "Major record labels, if they ever were, are no longer the gatekeepers. It's the music that matters, not the source anymore. You don't have to have a [major label] to produce an album anymore. The power now is with consumers, not labels."
Simply put, that is the future of online music.