Analysis: Edgar Bronfman's Big Statements About Universal/EMI Deal Are Business As Usual -- But Much More Public
Analysis: Edgar Bronfman's Big Statements About Universal/EMI Deal Are Business As Usual -- But Much More Public

While the mainstream media is getting worked up over Edgar Bronfman's comments on how dangerous a combined Universal/EMI recorded-music operation will be - not to mention his proclamation that the Warner Music Group will fight it "tooth and nail" -- music industry sources say the company's opposition is just baseball as usual.

Over the past 15 years, every deal that involved a merger or acquisition between the majors has been opposed by some if not all of the majors not involved in the transaction, the sources say. The difference this time is that it was done so publicly and so dramatically.

According to high-ranking sources with the Warner Music Group, Universal Music Group and EMI (either currently or at the time), when Sony and BMG were merging in 2004, all three majors filed statements of objection on the deal with regulators, both for the U.S. and the European Commission.

Likewise, when PolyGram and Universal were facing regulatory scrutiny for their merger in 1999, some if not all of the other majors objected, industry executives recall, and other majors also opposed the various EMI/Warner Music Group deals that fell through for one reason or another over the past two decades.

But that opposition was done quietly, in statements filed with the regulatory agencies. This time, the Warner Music Group is vocal in its opposition, as demonstrated by Bronfman's statements made at the "D: Dive Into Media" conference in Los Angeles in an interview with All Things D senior editor Peter Kafka.

On his last day as chairman of the Warner Music Group, Bronfman -- who will continue to serve on the WMG's board of directors -- said Universal's acquisition of EMI's recorded-music operation "would create what I call a super-major that would basically determine the future of not only recorded music but really any kind of digital initiative as well."

He noted that while the Warner Music Group had also tried to acquire the EMI assets, if successful the combined companies would have had market share of slightly less than the Universal Music Group's current size, and would have left the music industry with three majors of nearly equal size. In contrast, the UMG deal that won the auction would create a major with over 40% in global market share.

Given its size, the deal would not only impact the digital marketplace, it would drive down the economics of artists deals and impact cultural diversity, Bronfman said.

EMI's Deals WIth Universal, Sony Face Inevitable -- But Different -- Regulatory Scrutiny

"A Universal purchase of EMI creates a completely different dynamic," he said. "I think it's dangerous, I think it's problematic and I think it's got to be stopped." Bronfman added that he believes Universal and to a lesser degree Sony, which led the investor group that won the auction for EMI's publishing unit, is suffering from "hubris" in thinking they could buy EMI at all, let alone a smaller part of it than currently contemplated.

Likewise, Sony/ATV's pending acquisition of EMI Music Publishing would put the largest holdings of publishing copyrights under one umbrella. But the publishing sale could have an easier time obtaining regulatory approval, some in the industry speculate, because Sony/ATV, with a 38% stake, is part of a consortium that is buying EMI's publishing assets, which will be kept in a separate company, although administered by Sony/ATV.

Sony/EMI Deal: Publishing Companies Would Remain Separate, But Managed by Sony

The last large successful music industry deal involving two majors occurred when Universal Music Group acquired BMG's publishing catalog and merged it into its own music publishing company. While the deal wound up being approved by regulatory agencies, the European Commission required the sale of some $135 million in publishing assets, like Zomba Publishing in the U.K. and Rondor Music, among other assets. This time, Universal has already said it intends to sell some undisclosed assets to help fund the EMI acquisition, although not because of regulatory concerns.

Given how frequently it has happened in the past, the regulatory agencies are not going to give too much weight to what the other majors say about the Universal and Sony/ATV deals for EMI, says a source on the buy side of the equation. The agencies will pay much more attention to what retailers, digital services, artists and independent music companies have to say on the deal, that source posits.

Bronfman, in his statements, may be trying to shake loose some asset sales from the proposed acquisition, because the Warner Music Group would be the likely beneficiary of any regulatory enforced asset sales.

In the independent community, Impala has been as vocally opposed to the EMI deals as it has ever been to a past proposed or enacted merger. This time, its position has been buttressed by A2IM. In a statement, A2IM president Rich Bengloff said: "The increased concentration of copyright ownership, historically, has always hurt the independent label community in terms of achieving economic parity and market access. We join our European Impala Independent music label colleagues in their concern over this acquisition and await more detail."

However, Impala may have shot itself in the foot with the Sony/BMG merger, according to a source, and that may hurt their position this time around. When Impala forced a second look at the 2004 merger between Sony and BMG and had the initial approval overturned, the European Commission Court of First Instance criticized the European Commission on a technicality, for the way it reviewed the deal, saying that the first review wasn't comprehensive in scope. So for the second time around, the depth of the investigation was massive in scope, or "hyper-rigorous," as one source described that process to Billboard at the time.

All major labels, not just Sony and BMG, had to turn over extensive documentation for 11 million sales transactions, according to a Billboard report in 2007, including every published price to dealers (called PPD in Europe or wholesale price in the United States); the kinds of discounts provided, whether they were for returns, co-op advertising or other allowances; and the amount of each discount. Then the data was broken down by customer in each territory, often on a weekly or daily basis, depending on how often the major changed its price or discount. In addition, the majors were required to provide a detailed analysis of online and mobile sales for several years, broken down in each of the 15 territories by repertoire, format, digital partner and other factors.

The EC Competition Commission's Neelie Kroes said at the time that the investigation represented one of the most thorough analyses of complex information ever undertaken in a merger procedure, and the end result showed that the merger would not raise competition concerns in any of the affected markets.

That finding set legal precedent in Europe, establishing that the merger did not have an effect on pricing, didn't harm the consumer and didn't hurt product differentiation, which events since then also show to be true, says a source involved in one of the buyer camps.

"If anything, music is more available to more people than before; pricing has come down, and there is more local product in the top 10 in local markets than five years ago," that source says. "So it hasn't hurt the consumers, and with the Internet, artists have more choices than before, in terms of how they issue their music, while merchants clearly are much more in control of pricing, considering the much-lower music pricing that exists today as opposed to back then."

Impala's executive chair Helen Smith says that the Universal Music Publishing acquisition of BMG is a more relevant ruling to look at because it "effectively set the maximum size for music companies," by asking UMG to scale back to what the European Commission considered an acceptable size.

As for the Sony-BMG merger, she says that was "ultimately approved by default," because the "decision was closed down" when BMG sold to Sony. "We didn't shoot ourselves in the foot," she stressed. "In fact we set the most important precedent in European merger control," which is a European Commission stance that there is no presumption in favor of mergers.

Besides, she added, "the merger test is different now. So I can't see any precedent that could apply other" than one she cited above.

Meanwhile, a source at a major, which is opposing the sale, said that if the regulatory agencies' ruling is more dependent on what others might say, Universal will have problems when digital services that couldn't procure licenses, or failed because they were forced to pay big advances, start coming out of the woodwork to object to its proposed EMI acquisition.

As the process stands now, Universal has already submitted a draft on the background of the merger, and its executives are fine-tuning the draft in response to the regulatory agencies' requests for some points to be clarified and other questions to be answered. That process is expected to be completed and result in the final draft being submitted in a formal filing within a few weeks. Then, the draft will undergo a second round of questions as the regulatory agencies seek comment from other parties like artist managers and retailers, with information processed from those interviews fed back to Universal and Sony to respond. The process could take another six months, sources speculate.

The stakes are high for UMG, which took on regulatory risk as part of its winning bid to buy EMI's recorded music operation for $1.9 billion. That means, if the deal is not approved, or conditionally approved, UMG would have to sell off or part of its recorded music assets and be stuck with any gain, or more likely, loss, that occurs from those sales.