The Universal Music Group/EMI Merger and the Future of Online Music

WASHINGTON—Senator Mike Lee (R-UT) today highlighted the challenges facing the music industry and identified important issues relating the Universal Music Group’s proposed acquisition of EMI’s record label.

Lee, the Ranking Member on the Judiciary Committee’s Antitrust Subcommittee, noted concerns about the merger, which would reduce the number of major labels from four to three and give Universal a larger market share than either of the remaining majors. Lee also stated that competitive factors within the recorded music industry may counteract the potentially harmful effects of the merger and that the transaction may also have procompetitive effects.

Lee concluded by stating that “government regulators should be wary of intervening in rapidly changing and innovative markets.”

Remarks as prepared for delivery at today’s hearing on “The Universal Music Group/EMI Merger and the Future of Online Music” are available below.

Ranking Member statement as prepared for delivery:

“The recorded music industry is both a staple of our popular culture and an essential element of our economy. The 40,000 businesses involved in the U.S. music industry employ over 100,000 people—including artists, managers, technicians, and record label staff.  And music can be big business.  Estimated revenues for the sale of recorded music in America now exceed $7 billion per year. 

“The music industry is also changing rapidly.  Last year, digital sales surpassed physical sales for the first time.  Online retail and digital distribution services provide consumers unprecedented access to lesser-known artists who might otherwise have been unable to obtain a recording contract.  Digitization has opened the door to a new and diverse world of innovative platforms and modes of competition.  But the rise of digital music has also made illegal, pirated recordings readily accessible to anyone with a computer and an Internet connection. 

“The future of online music is bright but uncertain.  Although Internet-based radio and other music services are growing at an impressive pace, some suggest that the Copyright Royalty Board’s rate-setting process is broken and should be reformed.  Whatever the nature of any such reforms, enforcement of our antitrust laws must be oriented to help foster innovative technologies and enhance consumer welfare.

“As the music industry attempts to traverse a changing technological and competitive landscape, some consolidation may be expected.  It therefore came as little surprise when Universal Music Group announced its intention to acquire EMI’s record label.  This announcement followed the 2007 transfer of EMI—which had suffered from sharply declining market share and enormous debt—to a private-equity firm and eventually to Citigroup.  

“Many industry observers welcome the prospect of Universal taking full advantage of EMI’s artists and catalog, helping to revive an industry in the midst of some decline.  Universal’s productive use of EMI’s assets promises efficiencies that an equity firm or bank is unlikely to achieve.

“At the same time, some competitors and public interest groups note that a Universal/EMI merger would reduce the number of major labels from four to three and give Universal a larger market share than either of the remaining majors.  Critics fear that a combined Universal-EMI could leverage its market power to increase prices to retailers and consumers.  Some worry that the combined company may stifle innovation in emerging digital distribution models by refusing to license its catalog to inventive services.  Others also fear that a dominant label might seek to exclude competitors from accessing key promotional space in retail and digital distribution services. 

“These concerns underscore the complex, evolving nature of the music industry and the need for careful analysis of the relevant markets and the manner in which market power might be exercised.  I am hopeful that this hearing will provide insight into the competitive landscape of the recorded music industry.

“Mergers play an essential role in our economy and should be permitted where they do not harm consumers.  Mergers can bring to bear superior managerial skills, allow for more productive use of underutilized assets, and result in economies of scale, reduced costs, improved quality, and increased output.  The potential for mergers generally provides positive incentives for industry managers, who recognize a need to maximize profits or face consolidation.  Likewise, innovators know there is an acquisition market for the businesses they create.

“Under most definitions of the relevant markets, this merger will result in a significant degree of concentration.  As the Merger Guidelines make clear, however, this is not the end of the analysis, and the merger may proceed where other competitive factors “counteract the potentially harmful effects of increased concentration.”

“Universal and other proponents of the merger assert that there is reason to believe such competitive factors are present in the various markets for recorded music.  Music retailers wield tremendous market power, with Apple and Wal-Mart alone accounting for up to 60 percent of sales.  This countervailing market power may well protect against labels successfully raising marginal prices. 

“The nature of the modern music industry may provide an additional protection against anticompetitive effects.  The prevalence and affordability of technology has increased the ease of entry substantially, resulting in greater access—and an increased variety of access points, whether YouTube, MySpace, or iTunes—for artists and independent labels.  In fact, independent labels now account for approximately 30 percent of music ownership. 

“Finally, at least at present, we cannot ignore the effect of pirated music.  The threat (and prevalence) of piracy surely impacts decision making throughout the legitimate recorded music industry, and therefore must be considered as part of any comprehensive antitrust analysis.

“Government regulators should be wary of intervening in rapidly changing and innovative markets.  The music industry has experienced much turmoil as it has struggled to adjust to changes in technology, pricing models, and consumer expectations.  Gone are the days when consumers bought entire albums in order to acquire a single song.  Also gone are the days when consumers purchased the same album a second time simply to update their libraries to the latest format.  Today, record labels and the artists they represent have their work stolen and shared freely over the Internet.  Every year consumers demand more music for less money.  As the music industry grapples with these and other challenges, government regulators ought to be careful not to prohibit reasonable business judgments and decisions that may lead to efficiencies and productive solutions.

“I look forward to hearing the testimony of the witnesses and thank them for being here today.”