Senators' Letter on Universal-EMI Deal Warns of 'Significant Competition Issues'

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Two U.S. Senators sent a letter to the Federal Trade Commission on Friday asking it to carefully review Universal Music Group's proposed acquisition of EMI.

"Without reaching any final judgment as to the legality of the deal under the antitrust laws, we believe this proposed acquisition presents significant competition issues that merit careful FTC review to ensure that the transaction is not likely to cause substantial harm to competition in the affected markets,"  Senator Herb Kohl (D-WI) and Senator Mike Lee (R-UT) wrote.

The former is the chairman of the Subcommittee on Antitrust, Competition Policy and Consumer Rights, while the latter is the ranking member on that committee, which is a part of the Senate Committee on the Judiciary. The sub-committee held a hearing on the acquisition on June 21, and the letter summarized some of that hearings testimony and findings.

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For the most part, the letter simply restated the arguments pro and con on the deal. But along the way, the Senators noted that "the effect of the proposed acquisition on digital distribution of music, and particularly on the ability of new entrants to launch new services, is particularly critical to determining whether the acquisition will have any substantial anti-competitive effects.

They urged the FTC to "pay close attention to the impact of this deal on digital music distribution services in assessing competitive consequences."

"There are considerable factual disputes in our hearing record as to (1) whether this acquisition would make Universal a greater gatekeeper of digital distribution platform success, (2) whether EMI is presently more open to licensing new services than other majors record companies, and (3) whether Universal has been hostile to licensing such services in the past."

While the letter continued by noting that the subcommittee had not reached any conclusion on these factual disputes, "resolution of these issues will be vital in determining whether or not this will substantially harm competition in the digital music distribution market. Recognizing that digital distribution is on the rise, the Senators reminded the FTC to also look at the "impact of this acquisition on the sale of physical recordings," too.

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"While the Commission should consider the possibility that powerful buyers may constrain the ability of the merging parties to raise price, It should not merely presume that the presence of powerful buyers alone forestalls adverse competitive effects flowing from the merger." The Senators added that, "resolution of this issue under principles set forth in the Merger Guidelines will be important in determining whether the acquisition raised the risk of price increases on consumers."

Finally, the letter urged the FTC to "consider the impact of this proposed acquisition on independent labels and new artists."

It concluded by urging the FTC to consider the issues raised in the letter when its is regulating on whether the proposed acquisition will substantially injure competition in violation of antitrust laws.

"The Commission should consider whether this deal may help revive the declining EMI record labels to benefit the music industry and consumers. It should also carefully analyze the acquisitions likely affects on the ability of new and innovative digital music services to enter the market, on competition for music sales and prices for consumers, and on the welfare of independent labels and artist."

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In response to the letter, a UMG Spokesperson said: "Since our proposed acquisition was announced, we have expected a thorough and rigorous review of UMG's acquisition of EMI from regulators in the United States. We appreciate the points raised in the joint letter from Chairman Kohl and Ranking Member Lee, as well as the Committee's recognition of the historic changes in the music industry over the past decade. Since this deal was announced, we have worked closely with the Federal Trade Commission to address many of these issues, and will continue to do so." The spokesman reiterated that UMG's "investment in EMI will create more opportunities for new and established artists, expand music output and consumer choice, and support new digital services. We remain confident of earning regulatory approval."

So far the FTC continues on its fact-finding mission, industry sources tell Billboard. But they also observe that UMG's proposed concessions to win regulatory approval from the EU don't include any divestments in the U.S., which they say indicates that UMG thinks it will have an easier time gaining approval here. But others say that is hogwash and ask why UMG should make any concessions here unless and until it becomes clear that such concessions are needed to get the deal approved by the FTC.

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Typically, the FTC mainly considers the impact of a deal on consumer pricing, while the EU also takes a broader examination on whether a deal will impact competition in an industry.

That's why the Senators' letter to the FTC is notable, because it goes beyond pricing and asks FTC to pay attention to how the deal will impact competition in the music industry. But it doesn't go so far as to oppose the deal, nor is it as strongly worded as the concerns Kohl expressed when he wrote a letter to the Department of Justice when it was reviewing the Ticketmaster and Live Nation merger in which he said that "it is clear that this merger raises serious competitive concerns warranting thorough scrutiny."

So far, the FTC has been mum on what it will do with regards to the UMG/EMI deal. But one source who says he has talked to someone close to the FTC says that the Commission may be considering proposing that some of the UMG concessions in its divestment package, instead be global in scope. As it stands now, UMG's divestment proposals include selling the Parlophone, Chrysalis, and Sanctuary assets in Europe.

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