Out of tune antitrust: Why concerns over music merger fall flat

Artists are no longer beholden to music labels. For competitive problems to exist there must be some barrier against new competition, and one can search in vain for any barriers to music distribution or production.

Because of piracy the sales of music have plummeted by over 50% in the past decade. The critics of the acquisition suggest that piracy has no competitive impact, but that claim is belied by the massive amount of people who have and will pirate music. Although piracy is illegal, it is still a major source of competition for legal music that keeps prices from rising too high. To suggest it cannot constrain prices is like suggesting you don’t need a rain coat in Seattle.
The critics of the deal flaunt the assertion that the combined firms would consume a 40% market share—a number that sounds scary. But there is less than meets the eye. First, the 40% figure is inflated—that number includes independent labels, such as Disney or Concord, that are distributed by UMG but which make their own competitive decisions. Second, decades of antitrust law have demonstrated that market share is only the beginning of the analysis, not the end. Courts have not condemned acquisition deals based on market share since Janis Joplin topped the charts.
The essential question is what the degree of competition between Universal and EMI is. And the answer is not much.
In today’s music industry competing labels are not what restrain prices. There is no evidence that consumers currently switch between Universal and EMI music because of price. Even if Universal tried to raise prices after combining with EMI, such efforts would be doomed to failure. Numerous powerful buyers will not sit still for price increases (Apple and Wal-Mart are no shrinking violets). And if Universal tried to increase prices consumers can always get their music from an alternative source, such as internet radio or streaming websites. Therefore a deal between EMI and Universal is not removing any constraints from their ability to set prices. The constraints lie in the music market itself, and all those factors will remain there after the acquisition.
Absent barriers any claims of harm are fanciful. Unlike CDs, the packaging and distributing of digital music is virtually costless. The exclusivity agreements that labels used to sign with record stores have vanished—largely due to the fact that record stores themselves have all but vanished. Major labels can’t exclude independent artists or labels from selling their music digitally, because it’s easy and relatively cheap for an artist to upload their music for sale online.
Artists are already experimenting with new ways to bypass record labels through internet distribution services like Bandcamp, which lets artists sell directly to their fans, or CD Baby and Tunecore, which allow artists to list their music in major online stores like iTunes and Amazon. The Arctic Monkeys found success largely on their own by handing out CDs with their songs and encouraging fans to share their music. By the time they signed to a major label they already had a #1 single. Established artists like Radiohead are also finding new ways to do business without a major label. After leaving EMI they released the album In Rainbows through their site asking fans to pay whatever they wanted. They later released the album in traditional stores through an independent label, where it reached the top of the charts in both the US and the UK.
Not surprisingly when the EU looked carefully at the last major record label purchase – Sony-BMG – it found that there were no anticompetitive effects even though Sony had secured over a 25% market share.
Since then competition has intensified. The advent of sites such as Pandora and Spotify provide almost limitless outlets to get music. Even if a major label tried to prevent an independent from selling its music online, consumers would be able to access the music from another channel. There are so many options for consumers to turn to—including illegal piracy—that even major firms are not able to raise prices without losing customers.
The music industry has undergone a major revolution in recent decades and may appear entirely unfamiliar to older generations.
The changes that have occurred have greatly benefited the consumer. Labels are no longer just competing with each other; they are competing with many new models of production and distribution. The deal between EMI and Universal would save hundreds of thousands of dollars in overhead costs—money that would ultimately benefit the consumer, as the combined firm would likely invest the savings in finding and promoting new artists.
In short, anticompetitive concerns that may have existed were this acquisition to have occurred 30 years ago are simply no longer relevant. The ability of consumers to obtain music from a multitude of channels negates any trepidation about market share that critics suggest.
Balto is a former policy director of the FTC and is now a lawyer in private practice.

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