US senators Herb Kohl and Mike Lee have co-signed a letter to the Federal Trade Commission in which they acknowledge that Universal’s proposed £1.2bn acquisition of EMI Music ‘presents significant competition issues that merit careful FTC review’.
In the letter to FTC chairman Jonathan Leibowitz, the two Senators recount the arguments heard at June’s Subcommittee on Antitrust, Competition Policy and Consumer Rights – attended by Beggars’ Martin Mills, Universal’s Lucian Grainge, Warner's Edgar Bronfman Jr., EMI’s Roger Faxon and Live Nation’s Irving Azoff.
Kohl (Democrat) is chairman of the Subcommittee, whilst Lee (Republican) - who previously approved of the blocked T-Mobile and AT&T merger in 2011 - is a ranking member.
The pair's letter states that a combined Universal/EMI would have a near 40% US market share, and describes Universal’s argument that its capital and expertise would revive EMI.
It recounts other arguments heared at the Subcommittee, including Mills' belief that the merger could harm the future of independent labels, which Kohl and Lee call "an important issue for the FTC to examine".]
[UPDATE: A UMG spokesperson told Music Week in response: "Since our proposed acquisition was announced, we have expected a thorough and rigorous review of UMG’s acquisition of EMI from regulators in the United States. We appreciate the points raised in the joint letter from Chairman Kohl and Ranking Member Lee, as well as the Committee’s recognition of the historic changes in the music industry over the past decade. Since this deal was announced, we have worked closely with the Federal Trade Commission to address many of these issues, and will continue to do so. Our investment in EMI will create more opportunities for new and established artists, expand music output and consumer choice, and support new digital services. We remain confident of regulatory approval.”]
The US Senate reaction comes a week after Universal's final proposed package of divestments was delivered to the European Commission. The label offered to shed Parlophone UK David Guetta's new deal and Pink Floyd's catalogue in order to reach an acceptable level of market share.
You can read some selected highlights from the letter, delivered by Kohl and Lee today, below:
"Without reaching any final judgment as to the legality of the deal under the antitrust laws, we believe this proposed acquisition presents significant competition issues that merit careful FTC review to ensure that the transaction is not likely to cause substantial harm to competition in the affected markets. In the course of this review, we also urge the commission to be mindful of the changes in the music industry in the last decade, particularly the shift to online distribution as the preferred way consumers purchase music."
"We urge the commission to pay close attention to the impact of this deal of digital music distribution services in assessing competitive consequences. There are considerable factual disputes in our hearing record as to (1) whether this acquisition would make universal a greater gatekeeper of digital distribution platform success, (2) whether EMI is presently more open to licensing new services other than other major record companies, and (3) whether Universal has been hostile to licensing such services in the past. Our subcommittee has not reached any conclusions as to the merits of these factual disputes. Resolution of these issues will be vital in determining whether or not this acquisition will substantially harm completion in the digital music distribution market."
"We also urge the Commission to consider the impact of this acquisition on the sale of physical recordings, which still account or half of music industry revenues. The deals critics argue that given the substantial increase in market concentration as a result of this acquisition, the deal may result in a price increase for CDs sold to consumers. These concerns are heightened because of the limited space available to sell CDs in retail stores.
"The advent of digital music distribution has eliminated nearly all of the chain record stores selling CDs. With the exception of a few ‘mom and pop’ local record stores, most CDs purchased today in brick-and-mortar stores are sold in the so-called “big box” national chains such as Walmart, Target and Best Buy. These retailers have very limited shelf space available for CDs and generally seek to offer current hits and top sellers, leaving little room for inventory of non-top sellers. Obtaining promotional placement in these stores can be crucial to a record label, in what is know as “end cap” and other high traffic space."
"The deal’s critics argue that experience supports the proposition that piracy is not a significant constraint on music industry price increases. For example, in 2009, Apple iTunes imposed a 30 percent price increase (from $0.99 to $1.29) on most digital singles without any appreciable loss in sales. Although piracy has clearly caused significant declines in music sales in the last decade, the rise of popular legitimate sites such as Apple iTunes has led to more recent growth in legal music purchases. In light of these trends, we encourage the Commission to examine the extent to which piracy would serve to constrain the ability of a combined Universal/EMI to raise prices."
"Finally, we urge the Commission to consider the impact of this proposed acquisition on independent labels and new artists. Our subcommittee has long recognized the importance of maintaining the fullest possible diversity in media, and this includes a diverse music industry. Independent record labels are an important avenue for new and varied artists to reach consumers. Our Subcommittee heard evidence of the potential dangers to the survival of independent record labels, including the testimony of Martin Mills of the Beggars Group. Whether this acquisition will likely lead to these effects is an important issue for the FTC to examine."
"In sum, we argue the Commission to consider the issues discussed above in determining whether Universal’s proposed acquisition of EMI will substantially injure completion in violation of antitrust laws. The Commission should consider whether this deal may help revive the declining EMI record labels to benefit the music industry and consumers. It should also carefully analyze the acquisitions likely effects on the ability of new and innovative digital music services to enter the market, on competition for music sales and prices for consumers, and on the welfare of independent labels and artists.
"The music industry has undergone a transformation in the last two decades as consumers access music through new online forms of distribution and as the market faces the challenge of piracy. Yet, in this as in other industries, robust completion remains the key to restraining prices, ensuring new and innovating from of distribution, and maintaining diversity of choice available to consumers."