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EMI deal threatens digital sales, consumer groups warn

by Ira Teinowitz | Published June 15, 2012 at 9:00 AM

Two consumer groups on Thursday offered a lengthy report detailing their reasons for demanding that the Federal Trade Commission reject a $1.9 billion deal from Vivendi SA's Universal Music Publishing Group to acquire EMI Music, the recorded music division of EMI Group Ltd.

In a 62-page report, the Consumer Federation of America and Public Knowledge said the merger would clearly violate Department of Justice/FTC merger guidelines and give the merged company market power to delay or distort new digital distribution business models.

"Simply put, the post-merger firm will have a strong incentive and increased ability to exercise market power, particularly in undermining, delaying or distorting new digital distribution business models in a market that has been a tight oligopoly for over a decade," the report said.

It added that elimination of EMI would create concentration in the music industry 5 times the level that is supposed to trigger antitrust concerns under federal antitrust guidelines. The merged company would hold more than 40% of the recorded music business, and the remaining three major labels would have 90%.

The report also suggested EMI played a role as a maverick in experimenting with limiting copy protection or dropping it entirely, unlike its music industry rivals. The loss of a maverick player would "compound the anticompetitive effects of the merger and significantly increase the likelihood that the merger will not only result in higher prices but also undermine incipient competition," the consumer groups said.

Vivendi's deal for EMI Music would give Vivendi rights to the Angel, Astralwerks, Blue Note, Capitol, Capitol Latin, Capitol Records Nashville, EMI Classics, EMI CMG, EMI Records, EMI Records Nashville, Manhattan, Parlophone, Virgin Classics and Virgin Records labels. Vivendi's Universal Music Group labels include A&M/Octone, Decca, Def Jam Recordings, Deutsche Grammophon, Disa, Emarcy, Fonovisa, Geffen Records, Interscope Records, Island Records, Lost Highway Records, Machete Music, MCA Nashville, Mercury Nashville, Mercury Records, Polydor Records, Motown, Universal Music Latino, Universal Republic and Verve Music Group.

In April both consumer groups announced their opposition to the merger and wrote to the Senate Judiciary Committee suggesting the deal raised the same antitrust issues that recently prompted regulators to challenge agreements between Apple Inc. and book publishers.

The report was issued a week ahead of a June 21 hearing by Senate Judiciary's antitrust subcommittee and offers plenty of fodder for subcommittee members to examine. Representatives of the consumer groups are expected to testify at the hearing.

The merger bears especially close scrutiny, the report suggested, because of its potential impact on nascent competition for digital delivery of music.

"The most compelling reason to give the merger extremely close scrutiny is the potential for development of alternative business models in the transition to digital music distribution coupled with incumbent record labels' strong interest in diminishing the impact of digital disintermediation on their control of the marketplace," the report said.

"Incumbent major record labels have incentive to stifle new digital distribution platforms because those platforms begin to level the playing field among major labels, independent labels and unsigned artists. This merger will dramatically increase the concentration of control over sound recordings to which distribution models must have to succeed."

It also cited as evidence concentration, industry moves to eliminate the sales of "singles" in order to bolster the price of CDs.

A spokesman for Vivendi did not return a request for comment.

The major labels fear digital platforms because the nascent technology better enables the licensing of lesser-known or niche music, the report said. "As a result, the major record labels lose one of their main selling points to musicians -- namely, that they have the connections and influence that a musician absolutely needs to get his or her music out in the marketplace," the consumer groups said. "Thus the dominant incumbent labels are particularly incentivized to stifle digital platforms that will decrease their influence as compared to smaller labels or unsigned acts."

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