Wednesday, September 5, 2012

Why the FTC should block the Universal/EMI merger (Article)

By Gabriel Bluestone, antitrust attorney, Girard Gibbs LLP, San Francisco

Antitrust enforcement has seen a welcome revival during President Obama’s first term. A highlight of this resurgence was the Department of Justice’s suit to block the proposed mega-merger between AT&T and T-Mobile last fall. Following an exhaustive investigation, the DOJ challenged and ultimately blocked the proposed merger in an effort to maintain a competitive wireless marketplace and ensure that the antitrust laws remained, as Justice Marshall stated, “the Magna Carta for free enterprise.”

Following AT&T’s unsuccessful effort, the attempt by Universal Music Group to merge with the recorded music business of EMI Group is now receiving significant attention. As the FTC reviews the potential merger, it should acknowledge the parallels with the AT&T/T-Mobile deal and seek to block the Universal/EMI merger in its entirety.

For those with rudimentary antitrust knowledge, the DOJ’s decision to challenge the AT&T/T-Mobile merger was easy given the wireless telecom landscape: a highly concentrated market, four major competitors, no recent entrants or prospective challengers, a competitive fringe dependent on market leaders AT&T and Verizon, and the potential removal of a “maverick” competitor in T-Mobile. 

Similarly, the proposed Universal/EMI merger would shrink the recording industry from 4 to 3 “majors” and transform the market from “moderately concentrated” to “highly concentrated” as defined by the DOJ-FTC horizontal merger guidelines. The merger would also give the combined entity control of 42% of recorded music revenue, compared to 43% of wireless revenue in AT&T/T-Mobile. Perhaps of even greater significance, a combined Universal/EMI would control 51 titles of the Billboard Hot 100 in 2011. To put these market share statistics in context, Paramount, the largest movie studio, had a market share of around 20% last year, and Comcast, the largest national cable operator, had a market share of just over 20% for pay television subscribers.

Could independent record labels make up for the lost competition? Doubtful. Outside of the major record companies, independent labels not only rely on the majors for distribution but also for the licensing revenues earned from services such as iTunes, Pandora and Spotify. In a post-merger world, Universal/EMI would have enhanced leverage with online music distributors, be able to deny licenses to new services, and would extract larger licensing fees, minimizing revenue for the independent labels. 

In a post-merger world, not only would the hundreds of independent labels have a harder time competing and earning licensing revenue but their revenue and retail share would likely decline and drastically minimize their likelihood of “breaking” an artist nationally or globally. Maintaining full diversity and consumer choice in the music industry is a national point of pride and an important element the FTC should not overlook. 

It is significant that some of the same consumer groups that slammed the AT&T/T-Mobile merger, such as Public Knowledge and Consumer Federation of America, have also sounded alarm bells over this one.

Perhaps the biggest parallel between the two mergers is the ability of the acquiring company to “win” regardless of the government’s decision to challenge.

In AT&T’s case, if the merger was approved, AT&T would have gotten rid of a competitor and gained control of T-Mobile’s spectrum in a spectrum-starved world. But if the deal failed, as it did, AT&T would tie up a major competitor for a significant period. Given that customers and employees tend to leave a company that is being acquired, the result would be a diminished T-Mobile. And, in fact, that prediction turned out to be true: while under contract with AT&T, T-Mobile lost more than a million subscribers.

The same scenario could play out here: if Universal acquires EMI, Universal becomes almost as large as its remaining competitors – Sony and Warner – combined. But if the merger runs into FTC opposition (as it has in Europe), Universal can seek to divest EMI and sell off pieces to smaller buyers, meaning that EMI effectively disappears. For Universal, this scenario eliminates a competitor and a noted industry innovator.

This leaves only one avenue for preserving EMI’s competitive position in the market – keep it together. Like the DOJ did in the AT&T/T-Mobile deal, the FTC should step in with affirmative and direct action and block this merger.

This article also appears in “The Hill” in the 8/29/2012 edition.

3 comments:

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