Universal faces probe into $1.9bn EMI bid

By Alex Barker in Brussels and Andrew Edgecliffe-Johnson in New York/ Financial Times 03/15/12

Vivendi’s Universal Music is to face a lengthy in-depth investigation into its $1.9bn bid for EMI’s record labels, as Brussels explores concerns that the tie-up could unfavourably tilt the balance of power in the digital music business.

Following a preliminary examination, the European Commission this week privately expressed its serious doubts over the impact on competition from the purchase of EMI, the home of The Beatles and Coldplay.

Universal Music, the biggest recorded music group by revenues, with artists such as Lady Gaga, technically has until today to submit concessions to eliminate these concerns and win an early green light.

But so far, no “remedies” have been proposed.

Those involved in the process say a full investigation, lasting roughly three months, into a transaction that would shrink the market to three big recording groups is all but certain.

Universal and the Commission declined to comment on the case.

Regulators will announce a decision on March 23.

Although talks are continuing, a more detailed second-stage investigation is also expected into a Sony-led consortium’s $2.2bn bid for EMI’s publishing business, which holds rights to songs such as “Over The Rainbow”. The deadline for a ruling is April 2.

Europe’s top competition authority has a formidable record of checking the ambitions of music industry barons, with interventions that both directly and indirectly shaped the world’s music business.

This time round, competition officials are paying close attention to the power of an enlarged Universal on digital music services such as Apple’s iTunes and Spotify.

The concern is that Universal’s clout could drive up prices or pose an obstacle to digital newcomers.

Universal says the precipitous, decade-long decline of the music industry gives the lie to more traditional notions of market power. Physical sales have halved in five years while in the digital market – the industry’s potential salvation – illegal downloads on some measures dwarf legitimate sales.

The Universal case in Brussels will partly rest on demonstrating that it is heavily restrained by the countervailing power of big retailers and online music services.

If the transaction is approved, Universal would hold about 40 per cent of sales in Europe and, together with Sony Music Entertainment, account for about 60 per cent of the global market.

Impala, which represents independent labels, has called for Brussels to “outright reject” a deal that would turn music into a “two-horse race”.
One regulatory bargaining chip for Universal will be the €500m of assets it has pledged to sell so that Vivendi can shore up its credit rating. Some of those disposals could be used to address specific competition concerns.

Another option in coming months is to offer commitments on its behaviour, specifically to address worries that new digital music services would not have fair access at a reasonable price to the Universal music catalogue.

Brian Message, chairman of the Music Managers Forum, told the FT Digital Media conference last week he was “pretty relaxed” about the Universal-EMI deal but wanted to avoid any one large label group having a “blocking right” by withholding its catalogue from new services and stifling the digital market.

Francis Keeling, global head of digital business for Universal Music, told the same event it would continue to license new digital services, to create demand to counter the “unlimited supply” of pirated versions of its music.

“We know that licensing what would be perceived a few years ago as extremely high-risk model is the only way to convert millions of consumers to experience these new services and say, yes . . . I’m willing to move to a paid-for environment,” he said.

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