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U.K. Watchdog Finds Sony's AWAL Deal Raises 'Significant Competition Concerns'

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A view of the sky line including Tower Bridge and the Shard at dusk on June 26, 2019 in London.

Sony Music calls the decision "perplexing" and based on "incorrect" understanding of AWAL's market position.

LONDON – Sony's $430 million acquisition of Kobalt Music Group's independent distribution and label division AWAL is facing further scrutiny from regulators after the U.K.'s competition watchdog found that the deal could lead to worse terms for artists.

The Competition and Markets Authority (CMA) said Tuesday (Sept. 7) that the merger could stifle innovation in the record business with independent artists potentially most at risk of losing out.

Central to the CMA's concerns is its belief that any loss of competition between Sony and AWAL would significantly reduce the number of digital distributors in the U.K., therefore making it harder for artists to strike favorable deals and potentially denying them the chance to gain greater ownership of their rights.

The CMA described AWAL as one of the few suppliers outside of the major labels that has gained a meaningful foothold in the market and, prior to the merger, was well placed to grow its business and become a "more significant competitor in digital music distribution" in the U.K.

The CMA said it had also found evidence that if the deal had not gone ahead Sony had been looking to expand its indie distribution arm The Orchard, focusing on mid-tier artists and leading to more direct competition with AWAL.

"We're concerned that this deal could reduce competition in the industry, potentially worsening the deals on the table for many music artists in the U.K.," said Colin Raftery, senior director at the CMA, announcing the findings of a 'Phase 1' investigation.

The CMA said its competition concerns relate only to Sony's purchase of AWAL and not its acquisition of Kobalt's neighboring rights business, which collects master recordings performance revenue for artists and was part of the $430 million deal, announced Feb. 1.

Sony and AWAL now have five days to address the CMA's findings and suggest a number of legally binding remedies. If they are unable to do so -- or the CMA rejects their proposals -- the deal will be recommended for an in-depth "Phase 2" investigation.

The CMA's intervention comes at a time when the major labels find themselves under increasing scrutiny from regulators. In July, a report by a U.K. Parliament committee said it had "deep concerns" over the power wielded by Universal Music, Sony Music and Warner Music, and how they leverage their dominant market share at the expense of artists, songwriters, and independents.

In July, the Digital, Culture, Media and Sport (DCMS) Committee asked the government to refer the matter to the CMA for further investigation.

Phase 2 investigations by the CMA are conducted by an independent panel and can last up to 24 weeks. (They can be extended by up to an additional eight weeks in special circumstances.)

If the CMA rules that the merger of Sony and AWAL does substantially restrict competition in the U.K. music industry it can push for Sony to divest all or part of the acquired business.

That's what happened to Viagogo in February when the CMA ordered the secondary ticketing company to offload its StubHub business outside of North America following an investigation into complaints of unfair competition (a buyer has yet to be found).

In a statement, a spokesperson for Sony Music Entertainment called the CMA's decision "perplexing and based on an incorrect understanding of AWAL's position in the U.K."

"We strongly believe this transaction is unambiguously pro-competitive and that our investment in AWAL is key to its continued growth, and future success," the spokesperson added.

Sony Music said it would continue to work closely with the CMA "to resolve any questions they might have." Until a resolution is found, Sony Music and AWAL must continue to operate as separate business entities, despite the merger being formally closed.

While Kobalt doesn't break out AWAL's operations by geography, overall the company says 45% of all of its revenue, including publishing, is derived from the U.S. marketplace. In the year ended March 30, 2019, AWAL had revenue of $106.2 million while its neighboring rights divisions had collections of about $65 million. Billboard estimates that AWAL's global market share is around 1-2%.

If approved, Sony's acquisition of AWAL will give the major label an estimated $1 billion in revenue from distributing independent labels through its The Orchard and AWAL operations.

Responding to the CMA's findings, Paul Pacifico, CEO of U.K. trade body the Association of Independent Music (AIM), said the watchdog raised "some crucial questions" around "healthy choices for artists and entrepreneurs" in the independent sector.