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Cooper and Griffin: Universal-EMI Merger Bears Close Scrutiny

Do you listen to or purchase music online? Then you should pay close attention to the proposed merger between two of the four major record labels, which threatens to deprive consumers of the benefits of digital technology in music distribution.

The Federal Trade Commission is examining the effect of the proposed merger of Universal Music Group and EMI Music. A close look at the Universal-EMI merger reveals that it will blatantly violate antitrust laws and stifle the development of consumer-friendly digital music services.

The advent of digital music distribution has been a boon to music fans, offering consumers easier, faster, more creative ways to access their favorite music and lower manufacturing and distribution costs. But major labels are often hesitant to embrace digital music distribution, in part because of digital services’ ability to empower artists to reach fans directly or through an independent label, without needing the help of a major label.

Mergers are complex things, and that is why the FTC and Justice Department recently revised the government’s “Horizontal Merger Guidelines”: a series of screens tests used to evaluate mergers. The Universal-EMI merger flunks every test by a wide margin.

This merger creates a highly anti-competitive market by eliminating one of only four major music labels in the world. It would give Universal-EMI control of about 40 percent of every major category of recorded music sales, including current CD albums, catalog CD albums, digital albums and digital singles you and other music fans buy every day.

In technical terms, the merger results in an increase in market concentration that is five times the level the DOJ and FTC identify as a cause of concern. Simply put, a combined Universal-EMI label will have a strong incentive and increased ability to exercise market power, particularly in undermining, delaying or distorting new digital distribution business models.

In plain antitrust language, the
Universal-EMI merger is “an unfair method of competition” that constitutes “an unreasonable restraint of trade” because it will “substantially lessen competition” and is “likely to enhance market power.”

The recent history of anti-competitive, anti-consumer conduct by the major labels has already raised alarms in the United States and the European Union. Add to this the long-standing view by music fans of EMI as the “maverick” of the major labels, the loss of which compounds the harmful effects of a merger and significantly increases the likelihood that the merger will cause higher prices, less access for consumers and fewer new competitors.

Universal’s claims that piracy will prevent the abuse of market power are directly refuted by evidence on consumer purchasing behavior and market research estimating how much record labels can raise prices without losing customers. A combined Universal-EMI would clearly have the market power to increase profits by increasing prices.

While digital distribution has forced record labels back into the business of selling singles, which they refused to do in the 1990s, that does not mean they have no market power. In fact, the record labels are now making almost as much money selling digital albums as they do selling singles, and they have increased the price of singles in the past couple of years about twice as fast as the price of digital albums. With one firm (Universal) controlling so much “must have” content, it could easily decide the fate of new digital music services by withholding content or insisting on onerous terms and conditions.

Digital distribution of music is transforming the way the market meets consumer demand, but the fact that a product is going digital or that an industry is part of the digital revolution does not mean it is immune to the abuse of market power.

The current major labels, confronted with a more efficient business model, will stop at nothing to preserve their dominance. Antitrust authorities must ensure that new competition is not squelched by anti-competitive tactics, using the full range of antitrust powers that have traditionally been used to ensure that consumers and the economy enjoy the benefits of the greatest amount of competition possible — denial or conditioning of mergers and acquisitions that substantially lessen competition, reversing actions that defend or expand monopoly power by undermining competition, prevention of unilateral monopoly abuse and blocking collusion.

This case highlights the importance of vigorous and rigorous enforcement of the antitrust laws to ensure that consumers continue to freely reap the benefits of the development of digital technologies.

Mark Cooper is director of research at the Consumer Federation of America. Jodie Griffin is a staff attorney for Public Knowledge.