FTC Ends Universal-EMI Merger Probe Without Action, EC Orders Divestiture of Major Assets

The FTC voted to close its probe because it found insufficient evidence that the acquisition would substantially lower competition in the market for commercial distribution of recorded music, Competition Bureau Director Richard Feinstein said in a statement (http://xrl.us/bnqspo). Products in the recorded music business are highly differentiated and companies compete for distribution in many ways, he said. Those include selling new titles in large retailers, sale of catalog titles, and the opportunity to promote artists and records. The FTC considered the level of direct competition between UMG and EMI across all those channels, he said. UMG is very strong in popular new releases, but EMI, the smallest of the major companies, has a portfolio more weighted toward older titles, he said. In addition, while all four major labels participate to different degrees in a variety of catalog discount programs, competition between UMG and EMI is relatively insignificant.

The agency stressed, however, that “the decision to close is fact-driven and based largely on the different product portfolios” of the two companies. It’s entirely possible that a transaction between other market players or on different terms could yield a different conclusion, it said. UMG said it’s pleased the FTC cleared the merger with no conditions, and that the acquisition has now been approved by regulators in Europe, Australia, Canada, Japan and New Zealand. Its investment in EMI will open up opportunities for new and established artists, expand music output and consumer choice and support new digital services, a spokesperson said.

The FTC also looked at whether the merger would affect development of interactive music streaming services, Feinstein wrote. It focused on whether UMG would have a better bargaining position after the acquisition, allowing it to extract better financial terms or gain advantages for its content. The agency also assessed whether the transaction would lead to higher costs for interactive streaming consumers or a more limited choice of recorded music, he said. There was considerable evidence that each leading interactive streaming service must carry the music of the majors to be competitive, he said. Because each major currently controls recorded music needed for the streaming services, the music is “more complementary than substitutable” in this situation, leading to limited head-on competition between UMG and EMI, he said.

The FTC also didn’t find enough evidence to support concerns that the acquisition would significantly increase the potential for coordinated actions among recorded music companies, Feinstein said. Market conditions have changed since previous antitrust enforcement actions, he said. Recorded music products are differentiated, with each label offering a wide portfolio of titles, the success of which is often uncertain and not strongly connected with the success or failure of other titles, he said. The net price for a title isn’t very transparent because of the complex negotiated arrangements among record labels, distributors, retailers and other rightsholders, he said. Moreover, many factors affect the sale of a particular title, and the transaction won’t change rivals’ ability to monitor each other or respond to competitive activity.

The EU investigation centered on the markets for digital music, the EC said. There, streaming services such as Spotify are growing, competing with iTunes and other download services, it said. The probe showed that in those markets, a record company’s size increases its bargaining power and thus its ability to hike licensing prices and impose more onerous licensing terms, it said. If UMG were to be significantly larger after the merger, digital platforms would likely face much steeper licensing costs, it said, particularly smaller platforms offering innovative ways for consumers to buy and listen to digital music. The EC was concerned that new digital platforms could be hampered in launching or expanding their services, reducing consumer choice and harming cultural diversity, it said. Some platforms might even have been forced to raise consumer prices for downloads and streams, it said.

To remedy that, the EC ordered UMG to sell, among other holdings: (1) EMI Recording Ltd., which owns the Parlophone label, home to artists such as Coldplay, David Bowie and Tina Turner. (2) EMI’s classical music labels. (3) Mute, home to The Ramones and Jethro Tull. (4) Various other labels and a large number of local EMI entities. UMG also agreed not to include “Most Favored Nation” clauses in its favor in any new or renegotiated contract with digital customers in the European Economic Area for 10 years. MFN clauses required digital customers to give any favorable terms granted to UMG’s competitors to UMG as well, the EC said. The company’s commitment will allow its rivals to negotiate more freely with digital customers and create more equitable circumstances between those competitors and UMG, it said. The rights must be divested worldwide and the condition covers digital and physical music, it said.

The FTC worked closely with the EC on the investigation “but reached different conclusions because of different evidence unique to each jurisdiction,” Feinstein wrote. Concentration levels in several EU countries were much higher than the combined market share the two companies have in the U.S., he said. In addition, European markets have a different, larger and more diverse set of customers, and the market dynamics relating to digital streaming services apparently differ significantly from those in the U.S., he said. The EC conditions, however, “will reduce concentration” in the U.S. as well, he said.

Sen. Mike Lee, R-Utah, said he was satisfied with the FTC’s approval of the deal. “In dynamic markets such as this one, in which innovation is constantly changing the means of production and distribution of music, government regulators must be careful not to intervene without evidence that a merger will harm consumers,” he said in a news release. “The FTC’s decision appears to be fact-based, well-reasoned, and focused on consumer welfare.” TechFreedom President Berin Szoka said the FTC recognized the combined companies “will no more be able to stifle competition from online streaming services than either firm could on their own.” It’s “easy to bash the big labels as dinosaurs, but the truth is that they need new distribution channels to succeed as legal alternatives to piracy,” he said separately.

Indies welcome the EC’s acknowledgement that UMG’s power is a problem across the digital and physical markets, and its “insistence on tough remedies,” said indie consortium Impala. The decision will freeze UMG’s ability to expand further, and sets a benchmark for constraining abusive behavior across the whole market, said Executive Chair Helen Smith. Nevertheless, it reinforces “what is already a powerful duopoly,” she said. Impala “will consider our options with our lawyers” when the full decision is published, she said. Public Knowledge staff attorney Jodie Griffin said it’s “incredible” that the FTC took no action to protect consumers and competition in the nascent digital music market. The merger will give UMG the incentive and power to burden new music services that benefit actual artists and fans, she said. UMG’s concessions in Europe don’t lessen the FTC responsibility to protect competition in the U.S. music market, she said.