Universal Music Group has long been one of the more innovative rightsholders when it comes to licensing new digital music services, yet also one of the more aggressive negotiators. The acquisition of (most of) EMI’s recorded music division has some spooked about UMG’s digital dominance going forward. But are they right to be worried?

Digital issues were to the fore in the debate over whether the UMG/EMI deal should be approved, more so than in any previous music industry merger. “The world has changed since the Commission’s latest decision in the recorded music industry in 2007 on Sony and BMG,” said Joaquín Almunia, VP of the European Commission responsible for competition policy, after announcing the conditional approval. “Our investigation focused on this booming digital market, where record companies license their songs to digital platforms such as iTunes and Spotify, or to telecom companies offering music to their clients as part of their subscription packages.”

He continued: “In this environment, the process of innovation and the increased competition in digital music distribution need to be preserved despite the consolidation that is taking place in the market for recorded music.” All the way along the approval process, the issue has been whether a merged UMG/EMI would, in Almunia’s words, “allow the company to impose higher prices and more onerous licensing terms on the providers of digital music.” The regulators decided that without divestments, even the large digital services might face higher prices and harsher licensing terms, while smaller platforms would be forced to pay more, and new entrants might be squeezed out of the market. The EC clearly thinks the agreed package of divestments significantly reduces these fears. Meanwhile, the Federal Trade Commission (FTC) in the US didn’t even ask for any divestments.

Independent body Merlin led the opposition, with CEO Charles Caldas saying, “We now have to face the possibility that the digital market could be dictated and controlled by two super majors [Universal and Sony], which would not be a healthy outcome”. Caldas also attacked the FTC decision, saying it will have a negative effect on the digital music market beyond the US borders. “The failure of the FTC to require similar, if not more stringent, remedies in the US market, where most digital services originate, gives UMG an open and unbridled path to controlling the shape and nature of the digital market,” he said.e market. The EC clearly thinks the agreed package of divestments significantly reduces these fears.

The fact that Universal likes to shape new services and the digital market overall is not in doubt. The company would argue that it does so for the greater good, taking risks on new models and services when rivals sometimes hold back. Universal was the only backer for the infamous Virgin Media unlimited downloads service, for example, although it has also been the most aggressive label in backing anti-piracy measures and lobbying governments to address the problem. Sceptics still suggest that the Virgin Media announcement was more about nudging the (then) UK government along UMG’s desired legislative path than actually getting a service up and running. Yet the label hasn’t been afraid to go it alone at other times, such as its partnership with UK mobile operator Orange on the Monkey service.

Two polarities of thought, then. One sees an expanded Universal using its clout to bring more innovative new services into the market, not less, and encouraging reluctant rivals to follow suit. And the other? That sees UMG flexing its muscles even more at the negotiating table to squeeze promising startups and secure advantages for its artists at the expense of rival majors and, particularly, independents.

The truth lies in between, as ever: there are good reasons for ensuring one label doesn’t get too big a market share, just as there are good reasons for thinking Universal intends to continue growing the digital market, rather than hampering it. The label can’t stop services that are up and running already, whether through collective licensing – UMG digital boss Rob Wells’ dislike for Pandora is a matter of public record – or through political reasons. Imagine the outcry if Universal pulled its catalogue from Spotify or Deezer now.

That said, Universal’s past conduct in other cases cannot be ignored. eMusic, for example, where changes to the service’s pricing structure when UMG added its catalogue sparked complaints from independent labels, and the departure of Beggars Group, Domino (now returned) and Merge from the service. As Beggars said in a statement at the time: “As eMusic has brought major labels on board, they have changed the terms on which they deal with labels in certain ways, some of which we have found impossible to accept.” UMG being one of the fingered culprits.

Universal also played a prominent role in the culture of equity stakes and high advances that characterised rightsholders’ approach to licensing for several years – a policy that now means a number of venture capital firms and investors steer well clear of any music startup requiring rights deals. Here, too, there are grey areas. Universal was the first major label to launch an API for developers, through its Island Def Jam subsidiary’s partnership with The Echo Nest in February 2011. EMI has since pushed that idea on several notches with its OpenEMI initiative. Together, the companies could bring this open thinking further onto the agenda of their rivals – although at the time of writing, it’s unclear what impact the merger will have on OpenEMI itself.

Everywhere, there are mysteries to be revealed over the coming months and years. With the biggest slice of the pie, Universal will have to be negotiated with first when digital services hammer out their licensing. This could mean it digs up all the truffles first, leaving rivals scrabbling for crumbs, but when it does sign up, it may increase the pressure on Sony and WMG to follow suit. An expanded UMG may have the heft to block a new service from launching, but equally, its support may be what carries them over the start line – Spotify US being a case in point.

One thing that needs to happen now that the EMI deal has been approved, though, is to broaden the licensing debate back out to cover all labels, and publishers too. If there’s a threat to the health of digital music services, it’s less about one label playing hardball, and more about all of them doing it. Launching a new service in the US – as Spotify found – is made infinitely tougher when having to accommodate four major labels, each with their own demands and restrictions. The problem that needs to be solved is not just about whether one major behaves itself, but whether all of them do.

It’s also about more than just the popular music markets considered by the FTC and EC regulators. UMG boss Lucian Grainge made it clear this week that the company is firmly focused on countries (and devices) where it expects strong digital music growth to come from in the coming years. “The trends that we are seeing alongside the spread of the latest technology, from tablet computers to the Android phones, make emerging markets increasingly attractive for digital music – and that’s paid-for digital music or digital music with revenues attached in some form,” said Grange in an interview this week. “We are looking at countries where there are consumers who are interested in international artists as well as local artists, like India, Brazil, Turkey, Egypt. Music is at the heart of all this. Content is at the heart of it – the most important part.”

Yet it’s precisely these markets that haven’t been talked about much in the debate over whether the merger should be approved, and what UMG should be forced to sell off. As the EC noted: “The Commission focused its investigation on the markets where record companies license their music to digital retailers such as Apple and Spotify.” A sensible approach for European regulators, but one that doesn’t say much about, for example, Brazil, India, Turkey and Egypt. In Brazil, UMG and EMI’s combined market share is 37.8% according to Music & Copyright – with Sony Music on 31.6%. In India, admittedly, a combined UMG/EMI at current market share levels would only have 9.4%, with Sony on 9.7%. Universal might not be in a position to control the shape and nature of all these emerging markets, but it still has an important role to play. Going forward, continued scrutiny is required of all the major labels – and Merlin too, plus publishers – in their approach to licensing digital services. And not just in the US and Europe.

Universal’s EMI deal must not be the end to the debate about digital licensing behaviour, but merely a waypoint along the road to a healthy, competitive and sustainable digital music market.

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