Let The Music Play: Critics Of Universal-EMI Merger Are Singing Off-Key
There are a lot of inaccurate claims – and bad economics – swirling around the Universal Music Group (UMG)/EMI merger, currently under review by the US Federal Trade Commission and the European Commission (and approved by regulators in several other jurisdictions including, most recently, Australia). Regulators and industry watchers should be skeptical of analyses that rely on outmoded antitrust thinking and are out of touch with the real dynamics of the music industry.
The primary claim of critics such as the American Antitrust Institute and Public Knowledgeis that this merger would result in an over-concentrated music market and create a “super-major” that could constrain output, raise prices and thwart online distribution channels, thus harming consumers. But this claim, based on a stylized, theoretical economic model, is far too simplistic and ignores the market’s commercial realities, the labels’ self-interest and the merger’s manifest benefits to artists and consumers.
For market concentration to raise serious antitrust issues, products have to be substitutes. This is in fact what critics argue: that if UMG raised prices now it would be undercut by EMI and lose sales, but that if the merger goes through, EMI will no longer constrain UMG’s pricing power. However, the vast majority of EMI’s music is not a substitute for UMG’s. In the real world, there simply isn’t much price competition across music labels or among the artists and songs they distribute. Their catalogs are not interchangeable, and there is so much heterogeneity among consumers and artists (“product differentiation,” in antitrust lingo) that relative prices are a trivial factor in consumption decisions: No one decides to buy more Lady Gaga albums because the Grateful Dead’s are too expensive. The two are not substitutes, and assessing competitive effects as if they are, simply because they are both “popular music,” is not instructive.
Given these factors, a larger catalog won’t lead to abuse of market power. This is precisely why the European Union cleared the Sony/EMI music publishing merger, concluding that “Customers usually select a song or certain musical works and not a [label] or a [label’s] catalog… In the event that a customer is wedded to a particular song…or a catalog of songs…, even a small [label] would have pricing power over these particular musical works. The merger would not affect this situation (since the size of the catalog does not matter).”
A second popular criticism is that a combined UMG/EMI would control 51 of 2011’s Billboard Hot 100 songs. But this assertion ignores the ever-changing nature of musical output and consumer tastes – not to mention that “top-selling songs of 2011” is hardly a relevant antitrust market (and neither is “top-selling songs of the last 10 years”). A label’s ownership of 51 songs that were popular in 2011 is not suggestive of its ability to price its full catalog of several million songs in negotiations with an online music service. Meanwhile, by other measures (this year independent artists garnered over 50% of Grammy nominations and won 44% of the awards) the major labels are hardly the only purveyors of valuable songs, and competition from Indie labels and artists is significant.
Edgar Bronfman, a director and former CEO and chairman of Warner Music Group, recently testified in Congress against the merger, arguing that a combined UMG/EMI could decide “what digital services live and what digital services die.” But Bronfman himself has elsewhere acknowledged that labels can’t prosper if they can’t sell their music. As chairman of Universal in 2001 he told Congress that, “for us to effectively market and distribute…albums, they are going to have to be on as many different online music sites as possible…. Frankly, if we lock away our catalog, we aren’t generating value for our artists or our shareholders or our fans.” As a competitor of UMG, Bronfman may have changed his tune, but his earlier point is even more true today with digital sales exceeding 50% of the market.
Far from wanting to constrain supply or hamstring distribution channels, labels have an incentive to make music widely and easily accessible. In fact, power buyers like Apple may have greater control over the marketplace than the labels. As UMG’s CEO Lucian Grainge bluntly noted, “[i]f Apple stops selling our music, we go out of business. Apple does not.” Critics downplay the role of power buyers in disciplining prices, but that assertion goes against the evidence.
Dismissive attitudes about piracy as a constraint on prices also miss the mark. For many consumers, a marginal price increase will indeed induce some piracy. More positively, the opposite also holds true: Increased consumer access to inexpensive and accessible legal content reduce piracy. Given the ravages of pirated music since Napster, it’s no wonder that labels – including both Universal and EMI – are now licensing their music to so many legal digital music services like Spotify. UMG’s incentives to continue to do so can only increase following the merger.
Finally, antitrust reviews must consider the benefits of the merger. Bringing together Universal and EMI could create substantial operating efficiencies. More efficient A&R and production should benefit artists (and fans) directly. And with a larger catalog UMG’s opportunities for pairing similar artists for marketing and concert promotion would increase, helping new and less-popular artists reach larger audiences. And UMG is in a position to breathe new life into EMI’s catalog with investment in human capital and artists’ careers that EMI simply can’t muster.
Claims of this merger‘s anticompetitive effects are not supported either by antitrust analysis or the realities of this market. Regulators should let the music play.