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Universal/EMI Merger: How Will It Impact The Music Consumer?

Universal/EMI Merger: How Will It Impact The Music Consumer?

Consumer Federation experts outline risks to consumers if takeover goes through

June 21st, 2012 by Daryl Nelson of ConsumerAffairs in News

Last week ConsumerAffairs discussed a possible music industry takeover by Universal Music Group (UMG), as the megalabel announced its attempts to purchase EMI, which would make Universal one of the most powerful record labels in the business.

Both public interest groups and music industry insiders alike believe the potential merger would negatively impact music consumers by leading to higher prices for digital and physical music releases. Universal would also gain more ability to control when new music is made available, and have more power to influence the overall sound of popular music by withholding content.

In their report "The Role of Antitrust in Protecting Competition, Innovation and Consumers As the Digital Revolution Matures," Mark Cooper, Director of Research for the Consumer Federation of America, and Jodi Griffin, Staff Council for Public Knowledge, discussed the potential consequences of the merger, and how it could threaten competitiveness within the music industry.

ConsumerAffairs talked with Cooper and  Griffin, and they spoke specifically about what's in store for the music consumer if the UMG/EMI merger is finalized.

Piracy overstated

In the report the authors state that record companies currently over-estimate how much piracy and digital sales impact market power. In our interview they expanded on that.

"The paper shows that there is a huge amount of spending on digital music," the authors said. "So much so that the industry is shipping 50 percent more units that they ever did. The question for the antitrust authorities is whether piracy would prevent a major with much more market power from raising prices by 5 percent or more."

"Consumers are paying $2.4 billion for legal digital music. Raising the price of a digital album, for example, by 50 cents would not turn people into pirates or increase piracy substantially. The majors know this because of their own studies of elasticities of demand and marketing strategies."

The authors fear that improvements on digital music distribution could also be harmed, since Universal would have the power to govern a disproportionate amount of music that would be needed by distributors to further improve serviceability.

Less innovation

"Innovation could be reduced", the authors explained. "Because the combined UMG/EMI would be able to withhold must-have content that digital distributors need to build successful new services, or only license that content on onerous terms, like disproportionately high royalties, enormous advances, or requiring an ownership interest in the new service. As a result, innovative new digital music services will be unable to launch or unable to compete."

The detailed report contains a section entitled "Pricing Patterns: Illegally Fixing the Price of CDs." The section shows how record labels historically manipulated CD prices when technology allowed CDs to be made and distributed at cheaper costs. Both Cooper and Griffin believe that if the merger goes through, the same thing would be done to digital sales.

In addition authors say, the UMG/EMI label would be so powerful that it would eventually set an industry trend, influencing other labels to heavily manipulate content in terms of pricing, availability, and new music consumers have access to.

Push prices up

"Universal could lead the effort to push prices up or they could withhold content from business models they do not like, or demand equity shares in those that they do. The other majors would be more likely to follow, since there ar fewer of them. This reduces competition and innovation in the space," the authors detailed.

But, you may ask if the consumer will truly be impacted by price manipulation since many listeners pay small amounts for downloads, or listen to music for free on sites like Spotify, or GrooveShark.

"The initial and primary benefit of digital disintermediation (combined with two consent decrees) was to force singles back into the market, which labels do not prefer but have yielded huge consumer benefits," the CFA researchers said, adding:

"The growth of digital albums has been strong of late. The fact that market power has been reduced by law and economics does not mean it cannot return. At $10.41 for a digital album, the price may still be too high. The industry remains concentrated and the majors control the flow of product through licensing. The major labels have begun to exercise control over prices. The purpose of antitrust merger review is to preserve competition."

Universal will face a Congressional hearing on June 21, as it tries to explain why the merger with EMI won't be harmful to the music consumer and the overall industry. Stay tuned for the results.