Wednesday 12 September 2012

The thorny issue of competition in the music industry

Sony and UMG - big fishes in a small pond?
Three news items caught my eye this week, all of which made me think about the impending sale of EMI's recorded music division to the Universal Music Group, creating a super music major with a near 50% share of the market in the creation and supply of recorded music in some territories.

The first story concerned reports that a Nielsen survey showed that ownership of smartphones amongst young teenagers (13-17 years old) in the USA had reached nearly 60%, and a whopping 73% of the 25-34 year old sector own smartphones. Overall across all age groups the rise of the smartphone has resulted in a 55% market penetration - and these are users who want content, and they want it now. and they WILL get it, legally or otherwise. Everything is just one click away.

Secondly was a report in the US press that showed that cinema attendance levels in the USA last weekend had reached their lowest level for two decades. The figures have reinforced Hollywood's fears that it is losing its allure to the internet, to competition from video games and of course to internet piracy. Its a situation the music industry faced some time ago and many commentators will just say that the film studios should have seen this coming and should have put in place new business models fit for the broadband era years ago.

Neelie Kroes
Thirdly was a report on the IPKat about comments made by EU Digital Agenda Commissioner Neelie Kroes at the 2012 Intellectual Property and Innovation Summit where Kroes compared the fragmented EU market with the American market - one territory governed by one federal copyright law - asking whether the European system was "consistent and relevant within the real world" adding that in an assessment of whether more changes were necessary to promote growth and stimulate innovation she was open to ideas, saying "Each day we fail to respond, we are missing out. Consumers miss out on easy legal access to their favourite products. The creative sector misses out on new markets, new innovations, new opportunities.  We miss out on new ways to share, recognise and appreciate our cultural heritage. And our economy misses out on the chance of new growth". Kroes had previously said that "too many barriers still block the free flow of online services across national borders" and resolved to rectify that within the EU.

The rhetoric echoes claims from new market entrants that the complexity of licensing for digital start ups is maddening and frustrating, sometime terminally. These are global businesses having to seek content licences on a country by country basis - even within the EU's 'single market'. 

In the EU and elsewhere, the recorded music sector and the allied music publishing sector are interesting examples of the tension between the need to establish business models fit for the 'real world' and the fear that ever ongoing consolidation is a real risk to diversity, and will result in a real lack of competition - to the detriment of consumers, artists and innovative new businesses. The fact remains that for a new digital start up in the European Union wanting to enter the music market, they will usually need to deal with collection societies in all 27 member nations, which are organised on a national basis, and that's just for Europe. The EU have looked long and hard at how collection societies operate and the Commission has brought an action before the European Court of Justice to determine the legality of the collection societies business methods and reciprocal representation mandates, and whether these constitute concerted unlawful practice which would fall foul of EU competition law and are an unlawful partitioning of the single market (the 'CISAC case). A final judgment is still awaited. The architect of the UK's proposed Digital Copyright Exchange, Richard Hooper, noted in his final report that the EU has 30 plus potential music licensors and that the EU should attempt to make the licensing regime multi-territorial, reducing the number of licensing bodies to perhaps 6 -10, each offering different, competitive repertoire. But why not reduce it to just one collection society for music - and one for recorded music? Or just one!  Now that would be an effective 'one stop' shop!

A combined EMI-Universal would have a 37.8% market share (2011 figures) for recorded music - and the already approved Sony-EMI tie up has a 31.1% market share in music publishing. If  UMG and Sony were to work in tandem, they would control 58.7% of the recorded music sector and 53.3% of the music publishing market - and that is starting to look like a 'one stop' licensor one its own - and surely would fit the needs outlined by Neelie Kroes.

The $2.2 billion sale of EMI's music publishing business to a Sony led consortium was approved by both US and EC competition regulators with the latter saying that the fact that Sony music publishing (Sony-ATV) was already run as a partnership with Michael Jackson's estate, and the new investors who came on board as part of a consortium for the purchase, coupled with divestment of EMI's Famous Music and Virgin Music catalogues, allayed competition concerns. But just how relevant those factors are remains to be seen.

Whilst it might make licensing sense, there are real fears of anti competitive behaviour should UMG get permission to buy EMI. Unfortunately the major labels, Sony and UMG included, have a poor track record to, say the least. Back in 2004 the then five major record labels  and the then three leading music retailers in the USA agreed to a $143 million court settlement for fixing the price of CDs in the USA at artificially high levels - which is not good for consumers! And artistes have perhaps fared even worse, and even after repeated success in the UK courts on the grounds of unreasonable restraint of trade, recording industry contracts often remain appallingly one sided and unfair: the recent spate of claims brought by artistes over artificially reduced digital royalties and other long established business practices  have been further witness to this.

But what of the third fear - that working together Sony and UMG could block new entrants to the digital market. well again, there is history, and perhaps history the major labels would like us to forget. Back when the internet was a young thing, between them the majors created two services, PressPlay (Sony and UMG) and MusicNet (Warners, BMG and EMI) which they launched as the solution to the sale of music on the internet. More recently the majors have failed to have an anti-trust case (Starr v Sony) dismissed in the US appellate courts which charges the majors with an attempt to monopolise the distribution of digital music and fix the price and terms on which is was supplied through those two platforms. The case is ongoing. More interestingly one could look at at the ownership of two of the current 'big' players providing new music platforms - the streaming service Spotify and the video platform Vevo. Sony owns 5.8% and UMG 4% of the former, and jointly own the latter along with investment from the Abu Dhabi Media Company. 

The success of Apple's iTunes re-taught the majors the importance of ownership of distribution channels - they lost control to Apple - and now Vevo and Spotify are two of the most important new channels. It also taught the majors the importance music has in creating new value and new business. Until iTunes launched, Apple was a successful but still niche computer company. It's now the second most valuable company in the USA. One of the arguments put forward in support of allowing UMG and EMI to merge is that artistes now have many ways they can independently reach consumers without needing a record label - but that becomes more clouded when those 'independent' pathways are owned by .... the record labels. But there again, UMG and Sony are minnows when compared to Amazon, Google, Facebook and Apple ........ so what's the worry?

What we seem to have are competition regulators applying 'analogue' solutions to a 'digital' issue. I am not sure that requiring UMG to sell off catalogues makes any sense at all (Parlophone, Mute,Virgin and the Chrysalis catalogues have all been suggested) . Nor do I think that issues of ownership (rather than control) has much relevance now. Indeed, one could argue we should allow MORE mergers to proceed to facilitate easier end-use licensing. Is that what Neelie Kroes needs? 

I am giving a talk at the Reeperbahn Festival Campus in Hamburg next week exploring what should and could be done by competition regulators, not least to protect diversity in the music industry, but the underlying issue that remains is that with the internet we have a global market, whether we like it or not, and if new entrants are barred from entering that market because of licensing complexities and there is failure to provide compelling legal services, we will end up with compelling illegal services. Its as simple as that. But conversely, allowing one or two companies to completely dominate the supply chain from the creation of music to the distribution of music to the provision of music to consumers could effectively bar any new entrants from entering the market without their permission, as well as allowing the potential for monopolistic behaviour with both consumers and the creators of music and songs. If licensing copyrights is the key, then it's licensing copyrights that the regulators should focus on, not the divestment of catalogue. The question is how? What would stop the UMG-EMI merger impeding investment, innovation and competition in the future? What would stop UMG and Sony shaping the digital future to suit their own ends? A requirement on UMG and Sony to licence other digital businesses openly, transparently and fairly? Might that protect new market entrants and consumers? An obligation to withdraw from platforms that interface with consumers (eg the sale of shareholdings in Vevo and Spotify) and a bar against future ownership - would that deliver a competitive market open to all? Or would a future requirement that UMG and Sony owe a fiduciary duty to songwriters and recording artistes offer protection to the creators of copyrights, especially if backed with criminal sanctions and a bar on so called 'royalty reducers'? The Murphy case brought into sharp relief the tensions between copyright and competition - and they can be complex, and the solutions even more so.

In the UK, the Copyright Tribunal has been an effective regulator of copyright licensing schemes. In the European Union the EC can fulfil this function. But if we need 'global licensing' then we would need 'global regulation' and no such thing exists - nor do I know of any such  plans on any politician's agenda anywhere. One to ponder, but we will know soon enough about EMI and UMG in Europe at least, with an EU set deadline of September 27th for a decision.

Detail on the Reeperbahn Festival Campus sessions "Diversity at Risk?" here and here 

Image of Neelie Kroes: European Parliament Flickr photostream and more on her address here on this Blog .

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