The sale of EMI is just the beginning in what could be a lengthy process that further consolidates the record and music publishing businesses. Citigroup's sale of EMI -- its recorded-music division to Universal Music Group and its music publishing expected to go to Sony -- will need the approval of regulators on both sides of the Atlantic. And each buyer faces different chances of coming out the other end unscathed.
The assumption of regulatory risk has always been a central component to the negotiation. While a bidder with no music assets would easily get regulatory clearance, existing music companies always face some scrutiny when a merger or acquisition reduces the numbers of competitors in a marketplace. EMI Group CEO Roger Faxon admitted as much when he wrote in an internal memo, "Universal will need to clear the necessary regulatory hurdles before they can take ownership."
Given EMI's small market share in recorded music -- 9.15 percent of U.S. track-equivalent albums, according to Nielsen SoundScan -- and labels' difficult financial position, Universal's acquisition of EMI's recorded music division could face relatively few serious hurdles in the U.S. "I don't think you're going to see any scrutiny of it," says one experienced antitrust attorney who has worked with major labels in the past.
However, Sony's expected acquisition of EMI Music Publishing may face greater headwinds. "I wouldn't be surprise if regulators looked at it very closely," says the attorney. While technology has drastically changed the recorded-music business, this person says, publishing "is what it is" and EMI has "tremendously valuable catalog."
Given historical precedent, the acquisitions are likely to fare better with U.S. regulators than their counterparts in Europe. The 2004 merger of Sony Music and BMG was approved in short order by the Federal Trade Commission and the January 2010 merger of Live Nation and Ticketmaster required only some small concessions -- namely the divestment of ticketing company Paciolan -- before winning the approval of the U.S. Department of Justice. However, the Obama administration has proven itself to be tougher than its predecessor by revising horizontal merger guidelines and opposing the $39 billion merger of AT&T and T-Mobile.
But mergers and acquisitions face a different regulatory environment in Europe. Both the recorded music and publishing companies may face more opposition than they would in the U.S. Although the Sony-BMG merger -- a joint venture of recorded music divisions -- was initially approved by the European Commission, it was voided by an appeals court in 2006. The merger was again approved in 2007 after an investigation.
Independent music companies association IMPALA doesn't believe divestitures will save the merger from failing to win regulatory approval, and said in a statement earlier today that it expects the EMI-Universal deal to be "blocked outright." Helen Smith, executive chairman at IMPALA, says various mergers over the years have already harmed the marketplace. "It's clear Universal hopes divestment might make regulators approve the merger, but I can't imagine that will work."
Smith argues Universal is already "beyond the size deemed acceptable" the last time the Commission looked at the company. And she notes that Impala has already asked the Commission to investigate Universal's partnership with Live Nation that Impala believes "will increase its market share even more."
A2IM president Rich Bengloff buttressed Impala's position on the sale of EMI.
"The increased concentration of copyright ownership, historically, has always hurt the independent label community in terms of achieving economic parity and market access," Bengloff said in a statement. "We join our European Impala Independent music label colleagues in their concern over this acquisition and await more detail."
But the acquisitions very well could go through, and the actions taken by the European Commission four years ago provide clues about what steps Universal or Sony might need to take to win regulatory approval. Compared to its approval Sony-BMG merger, the Commission took a tougher stance in 2007 when it approved Universal's 2007 acquisition of BMG Music Publishing. The Commission was concerned the acquisition would give Universal the ability and incentive to increase prices for the online rights of some of its repertoire. As a result, Universal was required to divest itself of a number of assets, including Zomba UK and Zomba US.
Sony and Universal both have considerable assets and numerous divisions to unload in the event regulators require a divestiture. And each would have no problem finding willing buyers. In any event, both companies made their bids for EMI's divisions with the understanding that the sale was the first of possibly many steps in integrating their acquisitions into their companies.