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Yesterday I watched PK President and CEO Gigi Sohn, among others, testify in front of the Senate Judiciary Committee Subcommittee on Antitrust, Competition Policy and Consumer Rights in a hearing on “The Universal Music Group/EMI Merger and the Future of Online Music.” Seeing the hearing in person was itself an achievement, as the line was already down the hall and around the corner an hour and a half before the scheduled start. Obviously, this is a subject people are interested in. PK, in particular, is concerned that allowing the largest record company to absorb the fourth largest would create a “super-major” label that would have too much control over methods of distribution and would harm consumer access to music.
The witnesses testifying in favor of the merger, Lucian Grainge, CEO of Universal; Roger C. Faxon, CEO of EMI; and Irving L. Azoff , CEO of Live Nation Entertainment, all focused on arguing that the current music industry environment is highly competitive and that the Internet creates many opportunities for emerging artists.
The witnesses opposing the merger, Edgar Bronfman, Jr., of Warner Music, Martin Mills of Beggars Group, and Gigi Sohn, pointed out that this argument is a deflection from the actual matter at issue, which is that a merger between Universal and EMI would result in a music industry superpower that would control 42% of the market and 51% of last year’s Billboard Top 100, and that such a superpower would have the ability to act as a gatekeeper for any new distribution service hoping to enter the market. Mills, additionally, disputed the idea that the Internet and digital content create a highly competitive market. He noted that although independent labels control 30% of the market, the major labels still control the distribution rights for two thirds of that 30%.
It wasn’t until Senator Franken asked Grainge directly that any of the proponents of the merger actually addressed the potential for such a significant market share to create an incentive to demand more in negotiations. Grainge argued that the record labels would always want to engage with different technologies because it is in their interest to create opportunities for people to purchase their music. He brought this argument up several more times throughout the hearing: if Universal doesn’t engage with every potential outlet, digital or otherwise, its artists will suffer and leave, its sales will drop, and it will end up going out of business.
However, as Gigi then pointed out, Universal hasn't actually been doing that. Universal has a long history of not only neglecting alternative services but actively fighting them. Universal has sued online services Deezer, Vevo and Grooveshark; its licensing demands for the Zune were excessive, insisting on a royalty for every player sold; and it was the third of the four companies to sign with Spotify and Google Music. Its actions clearly belie any claim that it would happily engage with digital distribution services without pressures from the other labels. When directly confronted with these examples, Grainge’s only response was to repeat his contention that Universal would have to be crazy not to license its music on as many platforms as possible. Apparently, Grainge believes his company has been making terrible business decisions for years. And although proponents of the merger were quick to note that digital technology makes artists less dependent on labels as an argument that the merger would not make the resulting company too powerful, they were unwilling to admit that this also gives them an incentive not to adopt the technology.
The other major theme that emerged was a comparison to the failed AT&T/T-Mobile merger. The parallels are obvious – two of the four major competitors in an already-under-competitive industry combining to form three. Mr. Grainge objected to this comparison, however, repeatedly claiming that unlike AT&T, Universal does not have a direct paying relationship with the consumer. Even if one accepts that Universal never distributes its own products to consumers (although it does sell its services directly to musicians), this ignores the important fact that antitrust regulation is about market control, and just like AT&T/T-Mobile, an approved merger would result in a company with a dramatically oversized share of the market, resulting in reduced competition and consumer choice.
Those were only the most common of the themes that emerged during the two-hour hearing. A few other highlights, though: UMG’s suggestion that antitrust law doesn’t actually apply to the music industry, the argument over whether record sales have suffered because of piracy or because of industry price-fixing, the way the conversation always came back to how the merger would affect Adele. I very much recommend that anyone interested in the topic watch the video or read the transcript when it becomes available online.