[Senate Hearing 112-550]
[From the U.S. Government Publishing Office]
S. Hrg. 112-550
THE UNIVERSAL MUSIC GROUP/EMI MERGER AND THE FUTURE OF ONLINE MUSIC
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HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
JUNE 21, 2012
__________
Serial No. J-112-83
__________
Printed for the use of the Committee on the Judiciary
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76-045 WASHINGTON : 2012
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin CHUCK GRASSLEY, Iowa
DIANNE FEINSTEIN, California ORRIN G. HATCH, Utah
CHUCK SCHUMER, New York JON KYL, Arizona
DICK DURBIN, Illinois JEFF SESSIONS, Alabama
SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina
AMY KLOBUCHAR, Minnesota JOHN CORNYN, Texas
AL FRANKEN, Minnesota MICHAEL S. LEE, Utah
CHRISTOPHER A. COONS, Delaware TOM COBURN, Oklahoma
RICHARD BLUMENTHAL, Connecticut
Bruce A. Cohen, Chief Counsel and Staff Director
Kolan Davis, Republican Chief Counsel and Staff Director
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Subcommittee on Antitrust, Competition Policy and Consumer Rights
HERB KOHL, Wisconsin, Chairman
CHUCK SCHUMER, New York MICHAEL S. LEE, Utah
AMY KLOBUCHAR, Minnesota CHUCK GRASSLEY, Iowa
AL FRANKEN, Minnesota JOHN CORNYN, Texas
RICHARD BLUMENTHAL, Connecticut
Caroline Holland, Democratic Chief Counsel/Staff Director
David Barlow, Republican General Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin...... 1
Leahy, Hon. Patrick, a U.S. Senator from the State of Vermont,
prepared statement............................................. 151
Lee, Hon. Michael, a U.S. Senator from the State of Utah......... 2
WITNESSES
Azoff, Irving, Executive Chairman and Chairman of the Board, Live
Nation Entertainment, Inc., and Chairman and Chief Exective
Officer, Front Line Management Group, Los Ageles, California... 8
Bronfman, Edgar, Jr., Director, Warner Music Group Corp., New
York, New York................................................. 10
Faxon, Roger C., Chief Executive, EMI Group, New York, New York.. 6
Grainge, Lucian, CBE, Chairman and Chief Executive Officer,
Universal Music Group, Santa Monica, California................ 5
Mills, Martin, Founder, Beggars Group, London, United Kingdom.... 12
Sohn, Gigi, President, Public Knowledge, Washington, DC., on
behalf of Public knowledge and Consumer Federation of America.. 13
QUESTIONS AND ANSWERS
Responses of Lrving L. Azoff to questions submitted by Senators
Kohl and Lee................................................... 39
Responses of Edgar Bronfman, Jr. to questions submitted by
Senators Klobuchar, Kohl and Lee............................... 45
Responses of Roger C. Faxon to questions submitted by Senators
Klobuchar, Kohl and Lee........................................ 59
Responses of Lucian Grainge to questions submitted by Senators
Klobuchar, Kohl and Lee........................................ 65
Responses of Martin Mills to questions submitted by Senators Kohl
and Lee........................................................ 79
Responses of Gigi Sohn to questions submitted by Senators Kohl
and Lee........................................................ 84
SUBMISSIONS FOR THE RECORD
American Antitrust Institute (AAI), Hunt Valley, Maryland,
statement...................................................... 90
Azoff, Irving, Executive Chairman and Chairman of the Board, Live
Nation Entertainment, Inc., and Chairman and Chief Exective
Officer, Front Line Management Group, Los Ageles, California,
statement...................................................... 104
Bronfman, Edgar, Jr., Director, Warner Music Group Corp., New
York, New York, statement...................................... 109
Buchanah, Jay, Rival Sons, vocals; Scott Holiday, Rival Sons,
guitar; Robin Everhart, Rival Sons, bass; Michael Miley, Rival
Sons, drums, Los Angeles, California, June 14, 2012, joint
letter......................................................... 123
Cronin, Kevin, REO Speedwagon, June 15, 2012, letter............. 124
Faxon, Roger C., Chief Executive, EMI Group, New York, New York.. 125
Forbes.com, Geoffrey Manne and Berin Szoka, joint statement...... 134
Grainge, Lucian, CBE, Chairman and Chief Executive Officer,
Universal Music Group, Santa Monica, California................ 137
International Federation of Musicians (fim), Benoit Machuel,
General Secretary, Paris, France, June 14, 2012, letter........ 149
Jones, Jeff, Apple, June 20, 2012 letter......................... 150
Madden, Benji, Good Charlotte, and Joel Madden, Good Charlotte,
June 11, 2012, joint letter.................................... 152
Mann, Chris, June 19, 2012, letter............................... 153
Merlin, Charles Caldas, CEO, June 19, 2012, letter and attachment 154
Mills, Martin, Founder, Beggars Group, London, United Kingdom,
statement and supplemental statement........................... 158
Rae, Casey, Deputy Director, Future of Music Coalition,
Washington, DC, statement...................................... 185
Sohn, Gigi, President, Public Knowledge, Washington, DC., on
behalf of Public knowledge and Consumer Federation of America,
statement...................................................... 190
THE UNIVERSAL MUSIC GROUP/EMI MERGER AND THE FUTURE OF ONLINE MUSIC
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THURSDAY, JUNE 21, 2012
U.S. Senate,
Subcommittee on Antitrust, Competition
Policy, and Consumer Rights,
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:18 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl,
Chairman of the Subcommittee, presiding.
Present: Senators Kohl, Klobuchar, Franken, Blumenthal, and
Lee.
OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Chairman Kohl. Good afternoon. Sorry to be a little late
this afternoon. We had some votes to complete.
In recent years, the music industry has undergone a radical
transformation as consumers embrace new digital music
technologies. The transformation is as revolutionary today as
the Gramophone, radio, and recorded music were a century ago.
The deal before us today is just one example of this
transformation. EMI is being sold in two parts--to Universal
and to Sony--so that there will only be three major record
companies remaining. Today we meet to consider the sale of
EMI's recorded music business to Universal and its impact on
competition, artists, and consumers.
As recently as 20 years ago, virtually all consumers
obtained their music by going to their local record stores to
buy records or CDs, often after hearing the music on the radio.
Today the market is very different. About half of all music
revenue comes from digital sales over the Internet, from
downloading songs and albums via iTunes, or listening to an
online music subscription service such as Spotify, to give only
two examples.
Recording artists can reach consumers directly over the
Internet without ever signing a deal with a record company.
Most record stores have closed as a result of the new online
services. For those consumers who still buy physical CDs, they
do so primarily at large chains such as WalMart or Target or by
ordering over the Internet on a website like Amazon. And the
music industry faces ongoing challenges from illegal
downloading of music over the Internet.
In this brave, new world for the music industry, Universal
and EMI argue that this deal should not concern us. They
contend that the market shares resulting from the merger should
not concern us and that the power to set prices is in the hands
of online distributors or the large chain retailers with whom
they must deal. And the ongoing problem of piracy, they argue,
effectively constrains their ability to raise prices when
consumers can easily get music for free via illegal downloads.
Nonetheless, we need to closely examine whether reducing
the number of major record companies to three and giving
Universal as much as 40 percent of the music business by some
measures will adversely affect competition. Concerns are
especially strong with respect to the market for online
distribution. Will Universal's music catalogue be so large as
to make it a gatekeeper that can make or break any new online
service and allow it to prevent new competitively priced
services from launching?
We must carefully scrutinize what this merger will mean for
consumers who buy music on physical CDs, still half of all
music sales revenue. In almost all industries, reducing the
number of competitors from four to three expands the market
power of the remaining companies and increases the risk of
higher prices. Why shouldn't these same principles apply to the
music business? Moreover, will the three remaining record
companies be able to obtain the lion's share of floor space and
promotions in retail stores, thereby crowding out the smaller
competitors?
We must be mindful of the possible harmful effects on
independent labels and artists. As in so many creative
industries, innovation and new forms of music often come from
those artists not signed to major record companies. We need to
be careful to ensure that this consolidation does not impede
the ability of independent record labels to compete or place
undue barriers to the emergence of new, innovative, and diverse
talent in the music industry.
So our examination of this transaction leaves us with more
questions than answers as we begin today's hearing. While we
recognize that the music industry has gone through enormous
changes and challenges in recent years, nevertheless we are
mindful of the basic principles of antitrust and the need to
maintain competition in this industry for both consumers and
artists.
We look forward to the testimony of our panel of witnesses
on these issues, and we are very pleased to be with you today.
Senator Lee, any comments?
STATEMENT OF HON. MIKE LEE, A U.S. SENATOR FROM THE STATE OF
UTAH
Senator Lee. Yes, thank you, Mr. Chairman. Thanks to all of
you for joining us today.
The recorded music industry is both a staple of our popular
culture and an essential element for our economy. The 40,000
businesses involved in the United States music industry employ
over 100,000 people, including artists, managers, technicians,
and record label staff. And music can be big business.
Estimated revenues for the sale of recorded music in America
now exceed $7 billion each year.
The music industry is also changing rapidly. Last year,
digital sales surpassed physical sales for the first time in
history. Online retail and digital distribution services
provide customers with unprecedented access to lesser known
artists who might otherwise have been unable to obtain a
recording contract. Digitization has opened the door to a new
and diverse world of innovative platforms and modes of
competition.
But the rise of digital music has also made illegal pirated
recordings readily accessible to anyone with a computer who has
an Internet connection. The future of online music is bright
but uncertain. Although Internet-based radio and other music
services are growing at an impressive pace, some suggest that
the Copyright Royalty Board's rate-setting process is broken
and should be reformed. Whatever the nature of any such
reforms, enforcement of our antitrust laws must be oriented to
help foster innovative technologies and enhance consumer
welfare.
As the music industry attempts to traverse a changing
technological and competitive landscape, some consolidation
may, of course, be expected. It, therefore, came as little
surprise when Universal Music Group announced its intention to
acquire EMI's record label. This announcement followed the 2007
transfer of EMI, which has suffered from sharply declining
market share and enormous debt, to a private equity firm and
eventually to Citigroup.
Many industry observers welcome the prospect of Universal
taking full advantage of EMI's artists and catalogue, helping
to revise an industry in the midst of some decline. Universal's
productive use of EMI's assets promises efficiencies that an
equity firm or a bank is unlikely to achieve.
At the same time, some competitors and public interest
groups note that a Universal/EMI merger would reduce the number
of major labels from four to three and give Universal a larger
market share than either of the remaining majors.
Critics fear that a combined Universal/EMI could leverage
its market power to increase prices to retailers and to
consumers. Some worry that the combined company may stifle
innovation in emerging digital distribution models by refusing
to license its catalogue to inventive services.
Others also fear that a dominant label might seek to
exclude competitors from accessing key promotional space in
retail and digital distribution services.
These concerns underscore the complex, evolving nature of
the music industry and the need for careful analysis of the
relevant markets and the manner in which market power might be
exercised. I am hopeful that this hearing will provide insight
into the competitive landscape of the recorded music industry.
Mergers play an essential role in our economy and should be
permitted where they do not harm consumers. Mergers can bring
to bear superior managerial skills, allow for more productive
use of underutilized assets, and result in economies of scale,
reduced costs, improved quality, and increased output.
The potential for mergers generally provides positive
incentives for industry managers who recognize a need to
maximize profits or face consolidation. Likewise, innovators
know there is an acquisition market for the businesses that
they create.
Under most definitions of the relevant markets, this merger
will result in a significant degree of concentration. As the
merger guidelines make clear, however, this is not the end of
the analysis, and the merger may proceed where other
competitive factors counteract the potentially harmful effects
of increased concentration.
Universal and other proponents of the merger assert that
there is reason to believe such competitive factors are present
in the various markets for recorded music. Music retailers
wield tremendous market power, with Apple and WalMart alone
accounting for up to 60 percent of sales. This countervailing
market power may well protect against labels' successfully
raising marginal prices.
The nature of the modern music industry may provide an
additional protection against anticompetitive effects. The
prevalence and affordability of technology has increased the
ease and entry quite substantially, resulting in greater access
and an increased variety of access points, whether YouTube,
MySpace, or iTunes, for artists and for independent labels. In
fact, independent labels now account for approximately 30
percent of music ownership.
Finally, at least at present, we cannot ignore the effect
of pirated music. The threat and the prevalence of piracy
surely impact decisionmaking throughout the legitimate recorded
music industry and, therefore, must be considered as part of
any comprehensive antitrust analysis.
Government regulators should be wary of intervening in
rapidly changing and innovative markets. The music industry has
experienced much turmoil as it struggled to adjust to changes
in technology, pricing models, and consumer expectations. Gone
are the days when consumers bought entire albums in order to
acquire just a single song. Also gone are the days when
consumers purchased the same album a second time simply to
update their libraries to the latest format. Today record
labels and the artists they represent have their work stolen
and shared freely over the Internet. Every year consumers
demand more music for less money. As the music industry
grapples with these and other challenges, Government regulators
ought to be careful not to prohibit reasonable business
judgments and decisions that may lead to efficiencies and
productive solutions.
I look forward to hearing the testimony today, and I thank
the witnesses for coming.
Chairman Kohl. Thank you, Senator Lee.
Now I would like to introduce our panel of witnesses. First
to testify will be Lucian Grainge, who is chairman and CEO of
Universal Music Group since 2011.
Next we will be hearing from Roger Faxon, who serves as the
CEO of EMI Group and first joined that company in 1994.
Our third witness will be Irving Azoff, executive chairman
and chairman of the board of Live Nation Entertainment, and
chairman and CEO of Front Line Management Group.
Next we will be hearing from Edgar Bronfman, Jr., director
and former chairman of Warner Music Group and former executive
vice chairman of Vivendi/Universal.
Next we will be hearing from Martin Mills, founder and
chairman of Beggars Group, who has served as vice chairman of
the Association of Independent Music.
Finally, we will be hearing from Gigi Sohn, president and
CEO of Public Knowledge and a member of the Advisory Board of
the Future of Music Coalition.
We thank you all for appearing at our Subcommittee hearing
today. I ask all of you now to rise and raise your right hand
as I administer the oath. Do you affirm that the testimony you
are about to give before this Committee will be the truth, the
whole truth, and nothing but the truth, so help you God?
Mr. Grainge. I do.
Mr. Faxon. I do.
Mr. Azoff. I do.
Mr. Bronfman. I do.
Mr. Mills. I do.
Ms. Sohn. I do.
Chairman Kohl. Thank you very much.
We will start now with you, Mr. Grainge, and we are looking
forward to your statement. We request that your statement be
limited to 5 minutes. Mr. Grainge.
STATEMENT OF LUCIAN GRAINGE, CBE, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, UNIVERSAL MUSIC GROUP, SANTA MONICA, CALIFORNIA
Mr. Grainge. Thank you. Good afternoon, Chairman Kohl,
Ranking Member Lee, and members of the Subcommittee. My name is
Lucian Grainge, and I am the chairman and chief executive of
Universal Music Group. It is an honor for me to be here today,
and I welcome the opportunity to discuss both the issues
affecting the music industry at large together with our
proposed acquisition of EMI's recorded music business.
I count myself lucky to have spent my entire professional
life in and around music. Music connects us, and it inspires
us. I started in the music industry 33 years ago as a talent
scout. I was a talent scout then, and I am a talent scout now.
As well as continuing to identify great artists, I also
scout for writers, producers, creative executives, startups,
entrepreneurs, and digital platforms.
The music business is reinventing itself on a daily basis,
and this reinvention has not always been kind to us. The
industry is half the size it was in 2001, and I am sure that
Roger, Edgar, Irving, and Martin will agree that we have all
managed our business through a very difficult decade. So it is
invigorating to talk about the future this afternoon, to talk
about the potential for growth, the commitment to digital
expansion, and a fresh, positive energy.
The mere concept that we can discuss growth is not
something we have been able to do for a long time. I believe
that Universal's proposed acquisition of EMI sits at the heart
of this positive move forward. Roger Faxon has done a
remarkable job with EMI under challenging circumstances, and
the company is now on a sounder footing. We propose to make a
courageous investment in EMI to sign artists, develop them, and
invest in future technologies and distribution models.
Digital is our future, and we are wholeheartedly committed
to supporting every viable legal venture that gives consumers
what they want, when they want it, and on the devices that they
want.
Today fans learn about music on blogs and social networks
and listen to it on many services, including, for example,
Cricket's Muve, Rdio, and Spotify.
Retailers have the ability to find out what consumers want
as a result of this new technology. We cannot control
consumers' access to music or artists' access to consumers.
Technology has empowered artists and consumers, and I am proud
that Universal has well over 100 digital music partnerships in
the United States alone.
The proposed acquisition comes at a time when all the
competition in this industry is as fierce as I have ever known
it. All labels of whatever size see opportunities that simply
would not have existed even months ago. This competition is a
good thing, and it requires that we make the right strategic
moves in order to protect and promote our talent base.
Let me give you an example of how the landscape has
changed. Ten years ago, independent labels were 23 percent of
the market. Today they have grown to 30 percent. Digital has
lowered the barriers to entry. Technology and the Internet have
enabled anyone to create music, market music, and distribute
music.
Reinvigorating EMI with Universal's resources and
innovation is not only good for our company but good for
artists, consumers, and everyone who is connected with music.
As the artists create the market, Universal is also
delighted to have the support of the unions SAG-AFTRA and AFM,
both of whom represent America's recording artists and
professional musicians. Universal will always have one very
clear focus: to promote music in as many ways as possible.
So thank you for allowing me to explain why I am so excited
about the future of this industry, and I look forward to a
productive discussion with all of you.
[The prepared statement of Mr. Grainge appears as a
submission for the record.]
Chairman Kohl. Thank you, Mr. Grainge.
Mr. Faxon.
STATEMENT OF ROGER C. FAXON, CHIEF EXECUTIVE, EMI GROUP, NEW
YORK, NEW YORK
Mr. Faxon. Thank you, Mr. Chairman, Ranking Member Lee,
members of the Subcommittee. I am Roger Faxon, and as the
Chairman has said, I am chief executive of the EMI Group, and I
am pleased to join you today to discuss the Universal Music
Group's proposed acquisition of our recorded music division.
To appreciate the competitive implications of this
transaction, I think it is important to place it in the context
of the market for recorded music as it is today, and not as it
may have been in the past. Without a doubt, the music landscape
has changed beyond all recognition from where it was even 10
years ago.
In that time, overall industry revenues have more than
halved, even as digital revenues have soared. The forces that
have produced this decline have substantially shifted the
impact of record company consolidation, on both consumers and
the wider music business. I would like to take you through why
I believe that to be so.
As digital exploded, the CD fell through the floor.
Specialist retailers, which were the backbone of our industry,
all but became extinct. For the vast majority of the thinning
ranks of retailers that remain, music is not at the center of
their offering. But they are central to record companies and
the careers of their artists. So, inevitably, it is they, not
the labels, that are in control. It is the retailers who decide
which albums they stock and what commercial terms they will
take.
Retail concentration is even more pronounced on digital
platforms. Between the iTunes and Amazon services, you have two
players accounting for 90 percent of the download business and
over 80 percent of all digital revenues. In this environment,
pricing again does not sit with the gift of the record
companies, regardless of size or market position.
Digital distribution has created a music meritocracy. There
is no limit to the amount of music that can be stocked. That
means any band, budding or established, can have their music
distributed on digital platforms. Major record companies, if
they ever were, are no longer the gatekeepers.
In this meritocracy, good music rises to the top. The skill
is in finding that music and helping to connect it with an
audience, and that skill is not confined to one company or
group of companies.
The Internet has also democratized music promotion. The
explosion in media has taken promotional power away from the
editors and radio program directors and put it firmly in the
hands of music fans through Facebook, Twitter, YouTube, and a
myriad of other sites and services--all essential to an
artist's ultimate success. These fans do not care about market
position of an artist's record company. They care about the
music and whether it is any good. And radio stations are
focused on playing only the music that their extensive callout
research tells them will connect with the highest possible
audience, irrespective of its source. Again, it is the music
that matters, not the source.
Technology has significantly reduced the cost of entry for
new music companies. As a result, the market is more crowded
and competitive than it has been in my experience. So record
companies cannot control consumer pricing, do not control
access to consumers, cannot exert control over promotional
platforms or music discovery tools that fans use, and they have
to compete with the vastly increased number of alternative
paths to market for artists. If there ever were antitrust
issues implicated with label consolidation, it seems to me they
are not present today.
As a result of all this change, the focus of the music
industry has returned to where it should be--on helping artists
develop the most compelling music and working with them to
ignite passion for it in their fans. And I think we are doing a
very good job of that.
But we also have to assure that the creators of that music
are properly rewarded for their contribution. And there we are
not doing as well as we should. The ambiguity and
unenforceability of our intellectual property laws is failing
our creators. Individual rights holders are no longer able to
protect their music, ISPs are not held responsible for their
actions, and safe harbor provisions designed to encourage
innovation are instead being used as a shield by bad actors
seeking to build their own business without compensating the
creators whose music underpins those new businesses.
Technological and musical innovation are not mutually
exclusive. Content created by great artists and songwriters can
drive consumers toward new ventures, and exciting new platforms
and products can open up a wider market for the works of
creators. But our institutions have allowed the balance to
shift too far in favor of big technology. The impact on our
creative community has been devastating and will only worsen if
the scales continue to tip unchecked.
Music touches us in a way that nothing else can. For me it
has been an absolute privilege to be able to represent some of
the greatest artists this world has ever seen. Yet without a
solid framework of intellectual property rights to underpin
that creativity, we do not just threaten labels or jobs, but
America's ability to nurture the next Jay-Z, the next Beach
Boys, the next Norah Jones. That will not be the fault of any
merger or acquisition. It will be the fault of our own
unwillingness to stand up to protect one of the greatest
cultural strengths this country has to offer.
Thank you.
[The prepared statement of Mr. Faxon appears as a
submission for the record.]
Chairman Kohl. Thank you, Mr. Faxon.
Mr. Azoff.
STATEMENT OF IRVING AZOFF, EXECUTIVE CHAIRMAN AND CHAIRMAN OF
THE BOARD, LIVE NATION ENTERTAINMENT, INC., AND CHAIRMAN AND
CHIEF EXECUTIVE OFFICER, FRONT LINE MANAGEMENT GROUP, LOS
ANGELES, CALIFORNIA
Mr. Azoff. Thank you, Mr. Chairman, and thanks to the
Committee for having me here today.
I grew up in Danville, Illinois, a mid-American town with
all-American ideals, and briefly attended the University of
Illinois. For more than 43 years in the music business, I have
focused on one thing: serving artists. The music industry I
joined was a vibrant, emerging, and entrepreneurial business
whose format of choice was vinyl. Throughout all the choices--
vinyl, 8-track, cassette, and compact disc--one thing remained
constant: the power of the record label. The emergence of the
Internet has changed that.
I work with acts big and small, some that are household
names and some who should be but just have not yet gotten there
yet. Let me be very clear. None of them have to sign to a major
label anymore. Majors cannot sign every act, and the door is
open for many others to do so.
In fact, independent labels are capturing more and more
market share every year. Bon Iver won the Grammy for Best New
Artist this year. Esperanza Spaulding won last year. And Mr.
Mills' XL has brought us the biggest selling artist of 2011 in
Adele.
Approximately 40 percent of our artists are not even on
labels. I have no doubt that labels add value, but you just do
not have to have one in a world where artists can deliver an
album direct to fans themselves. It is a little like hiring an
interior decorator to redo your house. The experience and
results can be great, but some acts enjoy and prefer to do it
on their own and put their own imprint on things. With services
like iTunes, CD Baby, Top Spin, Reverb Nation, Pro Tools,
Facebook, Spotify--you name it--artists can do everything
themselves on their own very professionally.
It used to be that bands could not make a professional
album without the backing of a label. Labels used to be THE
gatekeepers to fans. But today those barriers have been blown
away. The new gatekeepers are the fans. Facebook and other
social media make fans the essential promotional power. If a
fan ``likes'' a song and tells a friend or two or 10,000, an
artist is on their way. The power today rests with consumers,
not record labels. So while the Internet has brought challenges
for many, it has also given bands opportunities, access, and
control previously unknown to any generation of artists.
The reason a combined UMG/EMI is a good thing rests in the
much bigger picture. Our industry has been turned on its head
in the last decade. With all the great developments the
Internet has brought us, the economics are still daunting.
Most musicians make a living today from touring, not record
sales as they once did. And it makes sense, since consumers are
not buying $15 CDs anymore, they are paying for a single track
download from Amazon or iTunes or listening to ad-supported
services that result in mere fractions of a penny-per-play
being paid to the artist; or worse, still, they just go to a
torrent site and get it for free. Late to embrace the Internet,
labels are playing catch-up. But any way you slice it, recorded
music sales are still the core of a label's business model.
Those who speculate about the demise of competition simply
do not live in the hyper-competitive music world that I see
every day. Competition is fierce between the major labels and
fierce between the majors and indies. Competition is fierce as
mobile services vie against one another and against Apple.
As for the brouhaha around this deal, Mr. Bronfman has been
talking about combining Warner and EMI for the better part of a
decade. The entire industry expected it to happen, Wall Street
expected it to happen, journalists expected it to happen.
Warner had a chance to outbid Universal in this process but
chose not to. Now they regret their decision and are spending
millions to fight this deal. Well, I do not think the
Government should step in to give them another bite at the
apple. That is not how our free economy works.
The fact is it would have been great if EMI could have made
a go of it on its own. But the recession, piracy, and the facts
surrounding Terra Firma and Citi combined to make that a pipe
dream. The aura of uncertainty made EMI a risky place for an
artist to sign. This business is about relationships and
confidence that the team you sign with will be right beside you
through the entire journey.
Uncertainty made it hard for EMI to compete. With Universal
taking over and their commitment to resurrecting Capitol
Records, there will actually be another record company for
artists to explore if they want to. As I see it, it is not one
less company--it is one more choice.
Bottom line, the people concerned that a combined UMG/EMI
would have too much power really just do not get what has
happened to the business over the last decade. Labels do not
control artists. Those days are gone. And no label in the world
can control the supremacy of the modern music fan. The power
shift has already taken place, and no one should worry for a
minute that it rests with the labels any longer.
Thank you.
[The prepared statement of Mr. Azoff appears as a
submission for the record.]
Chairman Kohl. Thank you, Mr. Azoff.
Mr. Bronfman.
STATEMENT OF EDGAR BRONFMAN, JR., DIRECTOR, WARNER MUSIC GROUP
CORP., NEW YORK, NEW YORK
Mr. Bronfman. Good afternoon, Chairman Kohl, Ranking Member
Lee, and members of the Subcommittee. I am Edgar Bronfman, Jr.
I thank you for the opportunity to discuss why Universal's
proposed takeover of EMI would do pervasive and permanent
damage to digital innovation, to the music industry, and to the
American consumer.
This merger would mean a world where one dominant company--
Universal/EMI--sets the prices, terms and conditions for future
digital evolution. Where that company would stand as gatekeeper
between consumers and choice, and where digital innovation, one
of the main engines of economic growth in this country, would
be stifled solely for the benefit of one already large company
that wants to become one dominant giant.
The Universal/EMI merger would reduce the number of music
majors from four to three, one of which would be a super major,
almost as large as the other two majors combined. Universal/EMI
would control more than 50 percent of the Billboard Hot 100
titles and 42 percent of U.S. recorded music revenue. It is
worth noting that a combined AT&T/T-Mobile would have
controlled 43 percent of U.S. wireless revenue.
Universal/EMI's 42-percent share would be extreme by almost
any standard. The media industry has never seen this level of
concentration. Last year, the largest movie studio, Paramount,
had about 20-percent market share, Random House was under 20
percent, and Comcast, the largest cable operator, had just over
20 percent of pay television.
Universal has tried to portray its market share as lower
than it actually is by excluding labels that it distributes,
but that is disingenuous. Owned and distributed market share is
the metric Universal uses when talking to potential purchasers
of its parent Vivendi's shares. That is the metric it uses when
it is seeking better economics from the Copyright Royalty
Board. And, most important, that is the metric it uses when
negotiating the terms of its digital deals.
When it comes to market power, especially in digital, where
contracts include all music under distribution, there is no
distinction between music that is distributed and music that is
owned. Market share alone should make this merger suspect. But
its profound ripple effects on digital innovation make it
untenable because of music's unique role in the vibrant
intersection between media and technology.
A decade ago, the Internet was assumed to be the music
industry's downfall, but we worked to reinvent ourselves, and
last year U.S. music shipments increased for the first time
since 2004. Digital downloads now account for over 50 percent
of U.S. recorded music sales, overtaking physical sales for the
first time. Even proponents of the merger acknowledge this
inflection point in the U.S. The real winners are consumers,
who now enjoy music in more ways than ever before. More
consumers pay for music than for any other form of digital
content, and we are still in the early stages of music's
digital transformation, with thousands of innovators dreaming
up new opportunities. However, this proposed merger would
dramatically impede, even derail, this transformation.
To understand the risk, let me share a story to illustrate
how innovation comes to market. It is about an entrepreneur
from a technology company who came to pitch Warner on a truly
disruptive idea in 2002--a digital music ``startup.'' His
company was a great innovator but had not seen significant
growth in years. Yet this person believed he could reshape the
way consumers experience music.
That entrepreneur was Steve Jobs. The company was Apple.
The startup was iTunes.
Although Warner had only 17-percent U.S. market share, it
was the first major to sign a deal with Apple. With that, Apple
had the foundation it needed. It shopped the Warner deal around
to the other majors and eventually got them all onboard. And
the rest is history. iTunes has defined Apple's content
strategy, a key to its becoming the world's most valuable
company.
The iTunes story shows how important the current
competitive balance among record labels is to enabling digital
innovation. The sequential negotiation technique that Apple
used in 2002 is used today by every digital startup. This
process is critical for disruptive digital services that
threaten the status quo. Entrepreneurs can reach terms with any
of the four majors and build momentum from there.
Though even at its current large size some of Universal's
actions are dampening digital innovation, as the Wall Street
Journal reported Wednesday, the market generally works today.
However, this proposed merger would obliterate the fragile
competitive dynamic that currently exists. With its 42-percent
market share, Universal/EMI would unilaterally determine which
services would live or die. It would be able to coerce ever
more onerous terms, taxing entrepreneurs, jeopardizing
innovation, constricting choice, and raising prices for the
American consumer.
In sum, consumers are well served when no one company can
dominate all decisionmaking for the market. Permitting this
merger would grant Universal/EMI the power to serve as the sole
arbiter of digital innovation. A broad group ranging from
consumers to artists to digital startups, innovators and record
companies alike have all expressed opposition to this merger so
that a diverse and vibrant future can exist for music fans
everywhere. We believe Universal's attempt to buy its way to a
position of unilateral dominance is inconsistent with such a
future. We hope this Subcommittee will agree, and we urge you
to do what you can to prevent this merger from being
consummated.
Thank you.
[The prepared statement of Mr. Bronfman appears as a
submission for the record.]
Chairman Kohl. Thank you, Mr. Bronfman.
Mr. Mills.
STATEMENT OF MARTIN MILLS, FOUNDER, BEGGARS GROUP, LONDON,
UNITED KINGDOM
Mr. Mills. I am honored to be here. Thank you.
Please forgive me if I use some strong words today, but
having read the statements of those on the monopolists' bench,
I believe they are needed. I speak not just for myself but also
for thousands of independent labels and artists worldwide.
Seven letters: C-O-N-T-R-O-L. It spells ``control.'' That
is what this is about.
Do not believe them when they say the music market is now a
Garden of Eden in which any young artist can become famous
overnight without a label. That is simply not true. Ask them
who these fortunate artists are.
Mr. Azoff says that 40 percent of his artists manage
without a label. When I Google his company, I find the Eagles,
Christine Aguilera, Kings of Leon, John Mayer, Van Halen,
Jennifer Hudson, Miley Cyrus, Kenny Chesney, Kid Rock, Avril
Lavigne, Aerosmith, and Jimmy Buffett--all on the front page. I
do not recall any of them becoming successful without a record
label. Do you? And all of them, I believe, released their last
albums in association with a major. Whereas established stars
may plow their own furrow these days, often with the benefit of
services from a major label, any new artist needs a label just
as much as Steven Tyler did. Even our artist Adele needed
Sony's strength in the U.S.A.
Do not believe them when they say market share is not
market power. Market power is why they are doing this--the
power to dominate digital services and impose their demands
upon them, the power to leverage a disproportionately onerous
deal, the power to squeeze out the competition, the power to
impose what Universal wants on the consumer. You will see how
they do that in the written evidence. It is all true.
Do not believe them when they say the independents
represent a countervailing competitive force, the thousands of
tiny, fragmented indies. Do not believe the 30-percent of the
market figure for indies in this context. Two-thirds of that
has digital rights controlled by the majors.
Do not think that the resulting Universal/EMI 40-percent
market share figure is as simple as it looks. Universal/EMI's
share of hit Billboard's Top 100 for the last year was nearly
70 percent when you include controlled shares and negative
rights to block its repertoire. Indeed, looking at just last
week's Billboard's charts, eight of the top ten singles will be
post-EMI controlled by Universal. That is 80 percent.
When you hear Universal downplay its market share today,
you should ask yourselves what market share do they insist on
in their commercial negotiations, for splitting anti-piracy
proceeds, for advances for music services. Very different. This
is about Universal leveraging new acts who are already
successful acts and obtaining more than their fair share of the
oxygen of exposure. Even today, contrary to what Mr. Faxon
says, major labels have 92 percent of radio play.
Most great music, the music that changes tastes and lives,
starts outside the mainstream, and that means on independent
labels. Elvis Presley, Muddy Waters, R.E.M., Adele--they all
did that. In fact, the economics of the majors these days means
that signing artists without mass market potential makes no
sense for them. If this transaction goes through, the next
great artist may never be found.
With the kind of increased market dominance that Universal
seeks here, it will completely control the shape of all new
digital services. No one will be able to deny them. Look at
their ability to raise prices of iTunes' new music. Look at the
Nokia ``Comes with Music'' service disaster and Universal's
hand in that. Look at the terms they were able to impose even
on Google. It is all in the testimony.
Jean-Bernard Levy, the CEO of Vivendi, Universal's parent,
is reported to have said that the aim is to boost Universal's
bargaining power with mass market stores and a new breed of
online distributor. Boost their power. Exactly.
Modern society sees unlawful monopolies as being bad, with
good and with obvious reason. Some are worse than others. If
airlines merge or soft drinks companies, is the effect on
consumer choice that bad? Isn't one seat or one soft drink
pretty much the same as another? But that is certainly not the
case with music. Music matters to people. It affects. It
changes lives. It is human. It is personal. You cannot
substitute a Katy Perry for a Lady Gaga for an Adele.
Yet in the world Universal seeks, great music will suffer,
and we will be headed for a lowest common denominator music
market with consumers having less choice and probably paying
more.
Universal is a great company. Do not get me wrong. It has
got great people. But there is big and there is too big. Give
them the position of increased power and greater dominance that
they seek, and they will exploit it. And specifically for a new
company to start and grow in this environment, as mine did,
will quite simply be impossible.
Please forgive my passion today, but not only do I
absolutely believe what I say, I know it to be true.
Finally, Mr. Chairman, I must apologize. I have to leave at
3:30, which is the anticipated end time, but I welcome any
questions before that point.
Thank you.
[The prepared statement of Mr. Mills appears as a
submission for the record.]
Chairman Kohl. Thank you, Mr. Mills.
Ms. Sohn.
STATEMENT OF GIGI SOHN, PRESIDENT, PUBLIC KNOWLEDGE,
WASHINGTON, D.C., ON BEHALF OF PUBLIC KNOWLEDGE AND CONSUMER
FEDERATION OF AMERICA
Ms. Sohn. Chairman Kohl, Ranking Member Lee, members of the
Subcommittee, thank you for the opportunity to discuss the
significant consumer harms the Universal Music Group and EMI
Music merger would cause if allowed. I am speaking today on
behalf of Public Knowledge and the Consumer Federation of
America.
Online music and digital platforms they ride on hold
tremendous promise for consumers and artists. Gone are the days
when music fans could only listen to the latest album if they
traveled to a physical record store, bought the album, and
brought it back home to play on a stereo system. Technology now
allows consumers to buy music at the click of a button and
listen to that music on any number of personal devices. Artists
also have been more empowered and capable to retain their
independence by utilizing digital distribution platforms rather
than going to a label.
Now, imagine that it is last year, 2011, a great year, and
you are in the business of starting a digital music service in
the United States. This chart represents the Billboard Hot 100
songs for 2011 as measured by sales and streaming activity. If
you wanted to attract the consumers who are the most active
music listeners, these 100 songs would have been the essential
package. Without them, any avid music fan would see your
service as incomplete, and you would not be able to attract the
critical mass of subscribers necessary to make a profit. By the
way, every single one of these artists is signed with one of
the four major music labels.
Now, imagine a world where UMG and EMI had already merged,
and they decided that they would withhold their songs from your
digital music service. If that was the case, then this is what
your digital music service library would look like. The
playlist suddenly looks very sparse. After all, you would not
have six of the top ten songs for 2011. You would not even have
a majority of the top 100 songs. A combined UMG and EMI would
own 51 of them. The fact is you just would not have a viable
digital music service, and as a result, you would be beholden
to the merged entity. That is the harm this merger presents to
consumers.
Despite all of the improvements in technology and reduced
costs of distribution, the music business is not immune to the
exertion of market power. As more consumers demand their music
through the Internet, this merged entity--a super label, so to
speak--has the inherent incentive and ability to maintain
dominance by exerting its market power over this nascent
business. That is why we believe this merger should be blocked.
If it is not, you will see less competition and choice in
distribution, stifled innovation, and higher prices. Already
the music industry has gone through breathtaking consolidation
as six major record labels have become four. Already innovative
online music companies are challenged to enter the U.S. market.
For example, the online streaming service Deezer, which is
similar to Spotify, it has enjoyed success in 200 territories
around the world, but it has not been able to enter the U.S.
market because of licensing.
EMI Music has gone against this trend. They were the first
label to sell a digital download. They were the first label to
remove digital rights management from their MP3s and iTunes,
allowing consumers to listen to their music on any device. And
they are the only label that actively works as a liaison
between application developers and artists through their Open
EMI Project.
If this merger is allowed, consumers and artists will be
the losers. Removing a maverick competitor like EMI from the
market will ensure that the remaining three players obtain more
control over the future of online music. I ask that the members
of the Subcommittee take a hard look at this merger and its
impact on consumers and artists.
Thank you.
[The prepared statement of Ms. Sohn appears as a submission
for the record.]
Chairman Kohl. Thank you, Ms. Sohn.
Mr. Grainge, Universal has argued--your company--that we
should not worry about its purchase of EMI even though this
will result in only three major record companies that will
remain because the record companies have little power over
price. You contend that pricing power is in the hands of online
companies like Apple iTunes or large chains like WalMart and
that you cannot raise prices because you compete with free
pirated music. You also argue that EMI is not competitively
significant because it has few top artists under contract.
So then please explain to us, why did Universal pay $1.9
billion for EMI?
Mr. Grainge. Senator, this is an incredibly changing
landscape. The competition within the industry is really quite
extreme and vibrant, and we are absolutely committed to giving
our music--giving the artists as many opportunities to get
their music to as many consumers and fans as we can.
I must say that from my experience and where I sit, we
would be insane not to license, develop, make our music
available through as many platforms, through as many retailers
as possible. Through technology, the consumer is voting and is
telling all of us what they want, and we have to make it
available.
Chairman Kohl. Mr. Bronfman, why do you think Universal
wants to buy EMI?
Mr. Bronfman. Well, I think the three words from the movie
``All the President's Men'' is useful: ``Follow the money.''
Universal is spending not only $1.9 billion to buy EMI, but it
is taking even further risk because it has agreed to pay that
purchase price, or essentially all of it, whether or not it
achieves regulatory approval. If it does not achieve regulatory
approval, the business goes back to Citi, Citi has to sell it
in a distressed sale to someone else and remit whatever price
they get to Universal. So Universal, if it does not buy EMI, is
at risk for hundreds of millions of dollars. So, clearly,
Universal wants it very, very badly. And the real reason is
that it buys them a market-dominant position.
It is very interesting to listen to the three witnesses to
my right talk about how the Internet has changed the industry,
and it has. But no one should be fooled that access equals
revenue. Access does not equal revenue. Ninety-two percent of
all radio airplay in the United States is controlled by major
music labels. Of all the songs on iTunes, 94 percent of those
songs have been downloaded 100 times or less in the past year.
This is an industry that does not operate on the 80/20
rule. It is an industry that operates on the 5/95 rule. Five
percent of our products represent 95 percent of our revenue. So
access is one thing, revenue is another, and controlling that 5
percent is very, very valuable indeed. And that is why they are
paying the price they are.
Chairman Kohl. Mr. Bronfman, we understand that Warner
Music attempted to purchase EMI. Is your opposition to the
merger motivated by Warner's commercial interest or the
interests of consumers? Isn't it true that your opposition to
this deal is that it does not benefit Warner?
Mr. Bronfman. Well, I certainly do not sit here and portray
myself as a saint, Senator. What I would say, though, is that
Warner's interests here are, frankly, not much more relevant
than Sprint's interests were in the AT&T/T-Mobile merger. The
fact of the matter is that this merger creates a market-
dominant position--a market-dominant position that could not
have been achieved by Warner had Warner acquired EMI. And so
the words from Mr. Mills and Ms. Sohn are real. Granting this
merger grants to Universal sort of the sole right to determine
what digital services live, what digital services die, what
they pay, how much they pay, et cetera. And I do not believe
that this Committee should allow a very clear and significant
concentration to occur. And I hope that the Committee will
continue to investigate this and will come to that conclusion.
Chairman Kohl. Mr. Grainge, if this merger is approved,
there will be only three major record companies, as we know--
Universal, Sony, and Warner. It is a basic principle of
antitrust analysis that reducing the number of competitors from
four to three carries substantial risk of higher prices to
consumers by making parallel pricing easier and eliminating the
possibility of one maverick company engaging in things like
price cutting. We saw this last year as we reviewed the AT&T/T-
Mobile merger that, as you know, was ultimately blocked.
So why should this merger be viewed in any substantially
different way?
Mr. Grainge. Senator, the thought that we would constrict
our artists whom we have invested in and constrict the
investment that we make in EMI to dissolve the market is--would
be commercial suicide. And I would also have every single
artist I have ever signed and every single artist I am ever
going to sign in a line outside my door saying, ``Get me out of
here.''
We have a duty, we have a responsibility--I sit with
artists--to sell and to bring their music to their audience and
to their fans and to help them market it. Some of the
descriptions are not the real operating world. We are here to
invest in EMI to create more music, to create more options, to
create more opportunities, and to create more platforms so that
the music can be discovered and sold to legitimate fans.
Chairman Kohl. Ms. Sohn, what is your view? Does this
merger carry the same risks for competition and consumers as
any four-to-three merger?
Ms. Sohn. Absolutely. I think the parallels with the AT&T/
T-Mobile merger are really spot on. If this merger were to go
through, the top three labels would have 90 percent of the
market, the top two would have 70 percent of the market, and
you would have this one super major label that would have the
ability to pick winners and losers when it comes to digital
distribution services. And these services lower prices for
consumers, they provide more choice. So if Universal--if this
new entity had the ability to basically decide who lives and
who dies among digital music services, that is going to raise
prices for consumers, and that is not good.
Chairman Kohl. Thank you.
Mr. Lee.
Senator Lee. Thank you, Mr. Chairman.
Mr. Azoff, you have achieved a great deal of success and
wielded a lot of influence within the music industry. If I am
not mistaken, Billboard ranked you first out of a list of 50 of
the most influential people in the music industry in 2012. So
given your background and your experience, I was curious to
know what you would say in response to the question--well, let
me just back up a little bit.
Critics of this merger have suggested--and we have heard
some of this today--that the majors continue to have near-
complete control over the music industry, especially when it
comes to emerging digital distribution models. Do you believe
this? Do you concur with that assessment? And if so, what is
your reasoning?
Mr. Azoff. First of all, you know, any position that I have
in the industry always flows because I represent artists and
they trust me. I have been predominantly a manager my entire
career, and that is the core business I run at Live Nation
every day. So when I speak, it is not just me saying these are
my views. This is kind of a view I take from having talked to
several artists, and, you know, labels traditionally have been
the last guys to get it. You know, they kind of acquire more
blocking rights than rights. There has been amongst the
executives--and I was one at Universal in the 1980s--fear to
change. I believe that we are at a transformational, wonderful
point where, through all the criticism and bad that the
Internet has brought for creative people in the music business,
you know, the time is here and now that they can do it
themselves.
You know, people that we represent like Jason Aldean on
Broken Bow Records, currently Calvin Harris on Ultra Records,
you know, I do not know why they are not on these charts,
because they have exploded. A band from England called One
Direction, you know, the music basically came off of Sirius/XM
Radio. It is a Sony act. But, you know, these are exciting
times where acts are happening quicker, careers are being made
quicker that are translating----
Senator Lee. Is that tending to diminish the influence of
the majors?
Mr. Azoff. Yes. My point exactly.
Senator Lee. So with this particular merger, do you have an
ongoing concern that--creating an even bigger major out of the
biggest major that currently exists, aren't you concerned that
might cause some problems?
Mr. Azoff. No. I actually think that it fosters artists to
consider the independent sector or do it themselves even more.
So from the artists' point of view that I talk to, the less
majors there are, the more options there are. And, in fact, for
those--and there are artists that require incredible investment
that do want the major label experience--the fact that there
will now be a vibrant Capitol Records, which Universal has
committed to staff, it is actually, you know, it is the best of
both worlds to me because you have now got more room for the
independents, but you also have a more vibrant Capitol Records
for those artists that do choose to want to be in that sector.
Senator Lee. So the impact on independent labels and
unsigned artists would not necessarily be a negative one, in
your opinion?
Mr. Azoff. It certainly might be a negative when I--you
know, most of the artists that I speak to consider it a
positive.
Senator Lee. OK. Ms. Sohn, I wanted to ask you a question.
In your written testimony, you state that EMI is not a failing
firm under antitrust analysis. Now, to my knowledge, neither of
parties has suggested that EMI is a failing firm, but they have
alleged that the merger might well result in what I think they
describe as just a more efficient allocation of EMI's
resources.
Do you believe that this proposed merger could or would
result in a more efficient use of EMI's resources?
Ms. Sohn. I think what this merger would do is eliminate a
maverick competitor, and that is not good for consumers, that
is not good for the market. As I said before, they were the
first label to take digital rights management off of their
iTunes. They were the first to license to any music service
that they did not own. They were the first to do a digital
download. They did a David Bowie song in 1996.
So the fact of the matter is that EMI continues to push and
push and push this industry to embrace digital technologies
that they really have had trouble embracing. It kind of makes
me laugh to hear some of the folks to my right now say how
wonderful digital technologies are and these digital music
services where I really think it actually scares the living
daylights out of them because these services have the potential
to eliminate the middle man. And they lower costs for
consumers, and when you lower costs for consumers, you also
lower your profit margin.
Senator Lee. I cannot imagine there is any player in this
market that is not scared by the digital revolution in some way
or another. That part is understandable. You are not suggesting
that the fact that there is this fear of the uncertainty
associated with the technology itself is indicative of a desire
to create anticompetitive effects?
Ms. Sohn. No, but I am saying it provides an incentive to
try to control the technology, to try to take a piece, as
Universal has often done, try to take a piece of these
services, charge excessive licensing rates, deny licensing. I
mean, that has really been the history of Universal, is
litigation, excessive licensing fees, denying licensing fees,
and taking a piece of these services.
Senator Lee. So an increased opportunity and an increased
incentive.
Mr. Grainge, do you want to respond to that? And while you
are at it, do you want to also respond to a claim that was made
a few minutes ago by Mr. Bronfman about the terms of the deal,
the $1.9 billion being paid basically risk-free to the current
owner of EMI?
Mr. Grainge. I can only continue to repeat what I have
said, that it would be creatively insane for us not to work
with as many digital services as possible. I have heard AT&T
mentioned here a couple of times. We have no direct
relationship, billing relationship, with the consumer. The
analogy just does not work. Our relationship, everything that
we do, is to create business. I keep using this word ``duty.''
We have a duty to the people that we sign, whether or not they
were signed in 1970 or whether or not they are signed tomorrow
afternoon. They come to us to market, to sell, to create, to
work with them on their music on a global basis, and that is
what we do.
I think in terms of some of the other comments--we
negotiate. Negotiation in a free market is the way a free
market is constructed, and everybody who sits with me on this
panel today who is in a negotiating position where you are
making agreements will, I hope, agree with me. And we are very
proud of what we do. I have spent my entire life, my entire
career protecting artists and trying to create business and
trying to create opportunity. And that is what I am going to
spend, hopefully, the next 33 years doing as well.
Senator Lee. Thank you. I see my time has expired.
Chairman Kohl. Thank you, Mr. Lee.
Senator Franken.
Senator Franken. Thank you, Mr. Chairman.
Mr. Grainge, first I want to thank you and your staff for
getting the information I requested yesterday. As I mentioned
during our meeting, I was very concerned when I heard that
major record labels like yours and Warner's are requiring
digital platforms to turn over a piece of their equity as a
condition of licensing your music library.
Let me quote your predecessor from 2008, Doug Morris. He
said, ``No one is going to build a business off our backs, if I
can help it, without us being a part of it.''
He went on to say, ``If one of these digital startups
becomes a big enterprise and it is off our product, it seems to
me that we should own part of it.''
Now, I understand this does not happen in every digital
deal, but I worry that if your market share--and you said you
negotiate, and market share counts in a negotiation. That is
what you do. You negotiate. That if your market share swells to
approximately 40 percent, you will have every incentive to
demand more equity, a larger cut of ad revenues, of upfront
payments, and other onerous terms from online startups as a
condition of turning over your content.
Can you explain to me why this is not the case?
Mr. Grainge. Well, firstly, in terms of what my predecessor
said, who is a great guy, I disagree with that.
Senator Franken. OK.
Mr. Grainge. It is in our complete interest to create as
many opportunities for the music that we create so that
consumers can buy it. In terms of our deals, we have well over
100 deals in the United States. They probably run into hundreds
and hundreds of deals throughout the rest of the world. We are
completely technologically agnostic. However consumers want to
buy their music, whether or not it is on a phone or whether or
not it is through a stream with a subscription model or ad-
based, we love it.
Senator Franken. OK. Well, let me go to Ms. Sohn on that,
because there is no doubt that the music industry has been
turned upside down several years with the explosion of digital
platforms, and that is the subject I am talking about right
now. And Mr. Grainge has repeated this over and over again. He
would be insane not to let every platform that comes to him
play his music.
Yet I understand from your testimony that Deezer, a music-
streaming service that expects to be in 200 countries by the
end of this month, has not been able to work out a deal with
Universal that will allow it to launch in the U.S. This seems
at odds with what Mr. Grainge is saying, and it seems to add
credence to the idea that Universal will exploit its market
position to the detriment of startup companies.
Can you explain what happened in the Deezer case and
whether we should be skeptical of Mr. Grainge's contention that
they are doing everything possible to cut licensing deals with
digital platforms?
Ms. Sohn. Thanks. So the Deezer situation is actually worse
than you portray it because Universal sued Deezer in France
because it did not like the fact that it was providing five
free songs in its so-called freemium tier, so that is the tier
that has ads on it. And it is interesting in France there are
very, very detailed regulations that regulate the music
industry and regulate these digital music services. So
Universal sued Deezer under these regulations, and the French
court not only sided with Deezer, but it said that Universal's
behavior was ``an abuse of a dominant position.''
So, again, this is a pattern of lawsuits. Universal sued
the video site Veoh, which won in court, was found to be legal
in court. It was the first to sue the music-streaming service
Grooveshark. It did not license to Beyond Oblivion, a Fox
service that never launched. It raised its fees on eMusic so
high that it was forced to raise prices, and it has equity
stakes in MOG, Spotify, and Vevo.
So that is the modus operandi. I do not consider that
embracing digital music services. I consider that trying
desperately to either get a piece of it or stop them.
Senator Franken. OK. Mr. Grainge, I want to give you an
opportunity to respond to that, but since Mr. Mills has to fly
away, I want to make sure that I get a chance to talk to him in
this round.
Mr. Mills, I had a meeting with Universal yesterday, and,
you know, every individual I liked. I think all of you probably
are friends, and for good reason. You are all nice people.
[Laughter.]
Senator Franken. And we had a great time.
Anyway, but someone in that meeting said that a single
artist could make or break a digital platform, because today's
consumer of digital platforms expect every song in the universe
to be on that digital platform, and if one artist is not on
that, they will go on social media and tell their friends, ``Do
not go on this because not every artist is on it.''
Now, I understand your artist, Adele, has chosen to keep
her songs off of Spotify. Is that true?
Mr. Mills. Some of them, yes. Most of the most recent
album.
Senator Franken. OK. Now, do you think that has impacted
Spotify's ability to succeed? And what would you say about this
argument that if you had one artist with one song missing, it
will bring down a digital platform? That does not seem to hold
for me.
Mr. Mills. No, I think that is an unsustainably extreme
position. Having said that, though, we believe with
independents that services that provide the widest possible
range of music will do best. If you look at iTunes and Spotify,
for example, they both do that.
Adele's decision to keep most of her music off Spotify has
been her own decision, not ours. We are great supporters of
Spotify. I think that clearly any digital platform needs big
songs. It needs the ``must-have'' repertoire, which is where
Universal's power and dominance and control is of considerable
concern to us because no service can exist without Universal.
And I think as the lady to my left mentioned, most tellingly,
when Universal came on to eMusic, eMusic was a platform
dedicated completely to independent labels and independent
artists. They realized over time that they could not sustain
their business with just independents. They gradually brought
on the majors. Universal was the last one to be brought on, and
when they brought them on, they changed their terms of trading
completely. The front-line prices went up, back-line prices
went down, and the service became a completely different
animal, such to the extent that we decided we didn't want to
work with it anymore. So Universal's dominance in that
particular instance changed the nature of that service.
Senator Franken. Well, thank you. My time is up. I hope we
can get to a second round. Thank you, Mr. Chairman.
Chairman Kohl. Thank you, Senator Franken.
Senator Blumenthal.
Senator Blumenthal. Thank you, Mr. Chairman, and thank you
for holding this hearing. And I would like to thank all the
participants for being here today, and I hope that, just as you
are friends of Al Franken now, you will be friends of all of us
at the end of it. But thank you for being here.
You know, the American Antitrust Institute submitted an
analysis, which no doubt you have read, showing that market
share in the digital and physical music marketplace has been
virtually constant over the last 6 years, and those shares have
stayed constant regardless of these major technological
revolutions in recording and distribution costs. And all of the
four major labels have retained their hold on 90 percent of the
market.
In the ordinary antitrust analysis, that would bespeak lack
of significant competition. In the ordinary antitrust analysis,
reducing competitors, assuming there is competition from four
to three, would sound major alarm bells. It might even be
regarded as a five-alarm fire. And, in fact, Ms. Sohn draws the
analogy to the AT&T/T-Mobile situation where, exactly as here,
the number of competitors went from four to three.
Is there something about this industry that makes it so
unique that we should not apply ordinary antitrust analysis,
Mr. Grainge.
Mr. Grainge. I think that market share in this industry is
far less relevant than maybe in any other industry. As I said,
telephone analogies and consumer relationships in my opinion
are not relevant. We do not have a direct relationship with the
consumer. And I think that the artists make the market. I think
that you are as good as your market, depending on what choices
you have made and what artists you have signed and how well you
have delivered them to the market and how well you have created
a demand for them.
We have heard about Adele and, Mr. Mills, I wish we had
Adele, but we did not. And Adele has had probably one of the
biggest-selling albums for maybe the last 10 years.
Senator Blumenthal. And I understand that point,
essentially--Mr. Azoff makes it very well--that artists have
the kind of access to their fans that perhaps makes it somewhat
distinctive. But should we simply disregard the normal
antitrust analysis here? Let me pose that question to anyone on
your side of the table who would like to--or any of the
witnesses. Mr. Mills.
Mr. Mills. I would like to answer it, if I may. I think any
ordinary antitrust analysis is even more crucial in this
because we are all monopolies. I have a monopoly on Adele's
music. Mr. Grainge has a monopoly on Lady Gaga's music. The
whole nature of copyright is that you can only get one artist
from any source. It is not like airline tickets which are
interchangeable, as I said in my address. We are all little
monopolies. And I think that makes antitrust far more crucial
in our IP-based industry than in any other.
Senator Blumenthal. Ms. Sohn.
Ms. Sohn. So antitrust law addresses market power, right?
It does not address market share so much as the amount of power
you can impose on a market. And as we said before, because this
new entity would control 42 percent of the market, it could
impose its will on any digital music service. That is what is
really, really important. And I think you cannot also forget
the fact that for corporations copyrights last 90 years. So
that is another monopoly on top of a monopoly. So you are not
only in control of the--each label not only has its own
artists, but those copyrights are also a monopoly that lasts 90
years.
Mr. Azoff. I think that we are a very unique industry, and
the point where, you know, I guess you could say that Apple was
built on the back of recorded music a bit, you know, the
company was struggling. Sony, the Sony Walkman certainly saved
Sony; the creative works of artists helped that. So I do not
think you can apply--you know, we are a quirky, crazy industry
that relay, you know, its people's creative works. What I love
about what is going on is for the first time in my 43 years in
the business, artists have real power. So I just do not think
you can apply market share standards to any of it for that
reason.
Mr. Faxon. I would like to add that I think that what I
have been hearing from those who are opposed is a view of a
market that is 10 years old. We are in a very different place.
In 2002, the major record companies tried to come together to
control distribution in the online world. They failed dismally.
It was a clarion call to an industry that thought that it could
control the way that music could reach consumers. It could not.
The consumers broke through. They found the music wherever they
could find it. They brought it, and that is why no music
company--no music company--can stand away from licensing rights
into the marketplace. It will not have a business.
And Mr. Azoff's customers and Mr. Mills' artists will never
sign on to those labels because they will not be in the market.
They will have denied access, and that means that they are out
of business. And it is a fundamental shift in the way in which
this market has worked.
Senator Blumenthal. My concern is that your argument or
justification for the merger seems to depend on asserting that
antitrust principles and precedent such as we would apply to
almost any other industry simply should not be applied here
because it is a unique or quirky industry that is fast-changing
and where fans have certain powers, which I think is a heavy
lift.
Mr. Faxon. Senator, I would not say that. I would not say
that antitrust principles should not be applied. They
absolutely should be applied. The question in antitrust is not,
as Ms. Sohn said, about what your market share is. It is about
whether or not you can exercise market power. And the balance
of power--the other services create your access. They have the
power to keep you from having access. There is an equalizing
force here, and that force is set really for the first time in
our experience by the consumer because the consumer decides
where they are going to actually find their music.
And so the power is sitting in the consumer's hands, and I
think that that changes the business structure, but it does not
change the analysis. It is about where the market power is. And
I think if you look at Ms. Sohn's discussion, she very clearly
talks about the empowering of artists and the empowering of
consumers. But nowhere does she bring that back to an analysis
of antitrust. If they are empowered, why is it that the record
company somehow is a blockage? They control where the market
goes, and we have to deliver against it. And every time this
industry has fought that, it has lost. And look at how much it
has lost.
Senator Blumenthal. My time has----
Mr. Faxon. It has lost half of its value. Sorry.
Senator Blumenthal. My time has expired. Mr. Bronfman I
think he wants to add something, so with the Chairman's
permission----
Mr. Mills. Mr. Chairman, sorry. May I be excused? I
appreciate that. Thank you very much.
Chairman Kohl. Thank you, Mr. Mills. We appreciate your
being here.
Mr. Bronfman. Senator Kohl, thank you for giving me some
time to respond.
First of all, I was interested to hear Roger say that the
answers that we have given are 10 years old. I would say at
least we have given some answers, because I have not heard
anyone on my right actually answer a question from the Senators
that they have asked.
What I would say is when we talk about market power, let us
just ask a very simple question. If you are a digital startup,
who do you go to to get a license? With all respect to Mr.
Azoff, who may be the most powerful man in the music industry,
they do not go to Mr. Azoff. They do not go to Live Nation.
They do not go to Front Line. They go to Universal, they go to
EMI, they go to Warner, and they go to Sony. And if Universal
and EMI together have half of the hits and 40 percent of the
market, there is only one place any digital startup must go.
Everyone else becomes irrelevant. They go to Universal.
Lucian, whom I have great respect for and great friendship
for, said he hopes we would agree that we all negotiate. Well,
licensing is about negotiation, but Warner historically has
always sought its market share in its licensing deals so that
its revenues would represent equal to its market share.
Universal has historically sought greater than its market share
in its negotiations with the licensing deals. That is a
negotiation. It is a free market. But let us not pretend that
all licensing is created equal. Licensing is not created equal.
In addition, Universal talks about how many licenses they
do. Well, let me tell you, at least 50 of those licenses are
exclusionary licenses. They are licenses where only Universal
Music is licensed and other music companies will be invited in
some time later.
So, again, there may be hundreds of deals, but they are not
all created equal. They are not all created in the same terms
and conditions. And so the issue is not whether or not
Universal will or will not license. Sometimes they will,
sometimes they will not. But it is also about the terms on
which a market-dominant power can license and will license.
Chairman Kohl. Thank you.
Senator Blumenthal. Thank you, Mr. Chairman.
Chairman Kohl. Mr. Grainge, you argue that record companies
are not so important in this new digital age. An artist does
not even need a record company to distribute music on the
Internet. Nevertheless, of the top-selling songs in 2011, the
four major record companies distributed 96.5 percent of them,
and the four major record companies controlled or distributed
100 percent of the 100 titles making up the Billboard Hot 100
chart for 2011.
Don't these stats demonstrate as clearly as can be that the
continued importance of the four major record companies is
intact?
Mr. Grainge. Senator, I am not aware of any of those stats.
All I can continue to say is we try and create as much quality
music and music that consumers want to buy, and that is what we
do and that is what we are dedicated to.
Chairman Kohl. Mr. Grainge, to follow up, the Wall Street
Journal reported this week that, speaking at a conference in
March of 2011, the chief financial officer of your corporate
parent, Vivendi, Philippe Capron said, and I quote: ``Given our
market share in many territories, North America, and most
European countries, we could not completely buy the recording
businesses of either EMI or Warner.''
Do you know why a senior executive in your corporate parent
held a view which is apparently contrary to yours just a year
ago?
Mr. Grainge. Senator, I understand--I have heard the quote,
and I understand why you ask me about it. I cannot speak for
him. I was not there. He is a financial person at our corporate
parent, and I disagree with him.
Chairman Kohl. Mr. Bronfman said a few minutes ago--and,
incidentally, he came to visit us the other day, and he said
you are among the smartest and toughest, most effective
executives around, so it does not detract from his admiration
for you, nor ours. To reiterate what he said just a minute ago,
you do not seem to answer questions very completely or very
accurately.
[Laughter.]
Chairman Kohl. Which is part of your smartness and
toughness. Would you agree with that, Mr. Bronfman?
Mr. Bronfman. I would agree with almost anything you would
say, Senator.
[Laughter.]
Chairman Kohl. You are pretty smart yourself.
Mr. Grainge, we understand that you argue that we should
not worry about this merger because illegal music downloading
makes it practically impossible for record labels to raise the
price of music when consumers can just go to illegal download
sites they can go to and get music for free. However, in April
of 2009, Apple iTunes, the Nation's leading online music
download service, raised its prices by 30 percent from 99 cents
to $1.29 per single for most new releases.
Despite this 30-percent increase, consumers continue to pay
for the music. The number of singles downloaded actually
increased from about 5 million per day in April of 2009 to over
9 million a day in January of 2010, less than a year later. All
of these consumers could have obtained this music for free on
illegal sites. Doesn't the experience with the Apple iTunes
price increase in 2009 show that consumers will accept price
increases for music?
Mr. Grainge. Senator, the original launch price was exactly
what it was supposed to be--a launch price. And it was
something which Apple and Steve Jobs, who I got to know over a
period of time, basically pulled out of the air.
Over that period of time since the launch of iTunes, there
was one price increase in a 9-year period. As part of that
deal, Apple lifted the restriction of the digital rights
management, which meant that the people who bought the
downloads could share them and move them around their own
devices. We increased the quality in the bits of the sound
quality, and they also at the time went to variable pricing,
and there were tens of thousands of tracks which also reduced
in price.
Chairman Kohl. Ms. Sohn, what is your view? Why would
consumers pay 30-percent higher prices for singles on iTunes
when they could just download the music from illegal sites for
free?
Ms. Sohn. Well, it is because there is absolutely no
evidence and the proponents of the merger have not presented
any evidence that piracy exerts any downward pressure on prices
whatsoever. And the fact of the matter is last year alone
consumers spent over $2.5 billion on digital music, so that
shows a real desire there to access music legally. So if piracy
was a factor, why didn't they just go get it for free? I mean,
if consumers are willing to pay an average of $10.40 for a
digital album, why would they suddenly resort to piracy if that
price went up to $11.
Mr. Bronfman's company provided some numbers to the FCC
showing that pirates are actually a really very, very small
percentage of music buyers and that, if anything, what Mr.
Grainge has to worry about are people that listen to the radio
because they are the ones that really do not buy music.
So piracy has had absolutely no effect on prices
whatsoever, and nothing I saw in any of the testimony of the
proponents showed otherwise. It is just hand waving.
Chairman Kohl. How do you respond to that, Mr. Grainge?
Then Mr. Faxon. Mr. Faxon, you first?
Mr. Faxon. Yes, I just think that we have to understand the
setting in which this industry is. In the world of music, over
the last decade plus, more than half of the sales of the
industry have disappeared. And in that same period, a vast
amount of music has been consumed through pirate sites and in
illegal ways--some quasi-illegal, some quite illegal. So there
has to be an inference that any logical person would take that
there is a relationship between the pirate world and the
legitimate world, and that consumer demand, consumers' desire
for music, has not declined. Their purchasing behavior has.
And so price has something to do with purchasing behavior.
It is our role, our job, to try and see whether we can find a
way to entice consumers back into the marketplace and pay so
that our artists get paid and that the entire cost of the
industry gets--so there is a constraint, and some people
clearly will go into the market and buy in only a legitimate
way. But half the demand has gone--half the actual purchasing
demand has disappeared, whereas consumption has gone up. So I
think it is a little disingenuous--I would say it does not have
any impact.
Chairman Kohl. Ms. Sohn, do you----
Ms. Sohn. This one really deserves a response because the
reason the revenue went down was because they were selling
nothing but CDs, they were found guilty of price fixing by 43
States and the Federal Government, and they stopped selling
singles. That is why--so your revenue went down because once
you were found accused of--found guilty of price fixing your CD
prices and then started selling singles again, people bought
the singles. They did not want to buy ten songs they did not
want for two songs they did. That is why revenues have gone
down. But as everybody admits now, your digital sales are
skyrocketing. It is just that--and both albums and singles. So
that is why your revenues were cut, not just because of piracy.
Mr. Faxon. I think one of the things that would be useful
is to ask for corrections of the record after we do this
because I think Ms. Sohn has misstated the history, and rather
than take your time with arguing over that, it would be good
for her to relook at her testimony and come back with a more
accurate----
Ms. Sohn. Look at the report filed by Public Knowledge and
Consumer Federation of America. It is all in there.
Chairman Kohl. All right. Before we turn to Senator Lee,
Mr. Azoff.
Mr. Azoff. Let me just tell you a quick story of how piracy
impacts an artist. An artist I started with at the University
of Illinois 40-some years ago retired about 20 years ago. His
earnings from his artist royalties and his writing and
publishing were around $400,000 a year. Traditionally in the
industry, that would go up every year. He came to see me
recently. His earnings from this very active catalogue have
dwindled to $68,000 a year. The only place you can point to is
piracy, because the catalogue sold steadily, steadily,
steadily, and the minute free music on the Internet came, it
just fell off a cliff.
Chairman Kohl. All right. Mr. Bronfman.
Mr. Bronfman. I would not sit here as someone who has run a
record company for the last 17 years and say that piracy has
had no effect. I think it has had some effect. But I would also
agree that also another large effect is that when iTunes came
along, we stopped selling albums and started selling singles.
And so you had people interested in buying, but they were
finally able to buy the song or two that they liked, not the 10
or 12 that we had forced them to buy in the album world.
The reason I make that point is if a new startup came with
a business model such as that that threatened the industry,
which in some ways created risk to the business model, and you
had half of the music controlled by one company, why would that
company license a business that threatened the status quo, that
threatened either its dominance or its business model?
Now, the truth is that Apple has been a great thing for the
U.S. economy, but it is not clear that, given what we know
today, that a dominant company would have allowed an iTunes
startup to occur, or the next one, because 6 years ago there
was no Facebook, 8 years ago there was no Google, 12 years ago
there was no iTunes. We do not know what is coming next. And
when you give one company the power to choose whether or not
those businesses can even begin, I think it trips the line of
reasonableness.
Chairman Kohl. Senator Lee.
Senator Lee. Thank you very much, Mr. Chairman.
Before we proceed any further, I just wanted to point out
that under almost any definition of the relevant markets that
we could think of, I think most of us in the room would have to
agree that this merger, if it proceeded, would result in a
pretty significant degree of concentration. But we also have to
remember that this is not the end of the analysis. You know, as
Section 5.3 of the merger guidelines make clear, on page 19 of
the 2010 edition, this is not the end of the analysis, and the
merger can still proceed where other competitive factors
counteract the potentially harmful effects of increased
concentration. And so that is a lot of what we have to look at
here. It is not a simple matter of just looking to whether or
not it is going to result in increased concentration. I think
that is pretty certain that it will.
So with that in mind, Mr. Faxon, I wanted to ask you a
little bit about EMI. EMI has passed through a number of hands
in recent years. You know, for a while it was owned by the
private equity firm Terra Firma, and then it was owned by a
banking firm, Citigroup--neither of them giants in the music
recording industry. Giants within their own realms, of course,
but their specialty, their expertise, is not in music.
So while the job that Citigroup has done, for example, is
admirable, there are some observers who perhaps are excited to
see EMI owned by a member of the music industry.
So my questions for you are: First, what do you think music
industry ownership for EMI might do for EMI? And then,
secondly, how do you think revitalization of Capitol Records
might affect the market?
Mr. Faxon. I think obviously Citibank is not a natural
owner of a music business. It has enough troubles on its own to
consume its time.
What a music business needs, as Mr. Azoff said, is it needs
stability because, remember, our product is not a disc. It is
the output of human beings who need to be motivated and need to
feel safe and protected as they pursue a very dangerous career.
Think about yourself the first time you ever got up on stage
and had to give a speech.
Senator Lee. And I did not even have to sing.
[Laughter.]
Mr. Faxon. Right, and you did not have to sing. So what we
lose in these events, in these discussions, is that we are
talking about human beings and the lives of human beings. Our
artists depend on us to be able to be with them and help them
achieve the success that they dream about. That is what our job
is. And with that comes a responsibility of being there for
them as they develop.
So one of the problems that has existed at EMI is that
sense of instability, the sense that what is going to happen to
that business going forward. So coming to a home where there is
a stable environment, where the team that helps the artist
develop their music and helps them find fans to love that
music, are going to be with them for a while, is a huge--it is
a massive improvement. And, you know, saying that is music to
my ears to hear Lucian talk about trying to keep Capitol
Records and build it back into the important label that it has
been in the past, that is a fantastic thing, and the people at
EMI are grateful for that.
But consumers should be grateful for it because it is--it
will be a creative engine. It will be a place--an engine room,
and it will be a place where more music will be provided into
the market. And we are in the innovation business. You know,
think about it. Our product is new, creative works on a
constant flow basis. That is what we are trying to bring in. If
consumers do not like it, we do not do well. If consumers do
like it, we do much better. It is as simple as that. And so it
is a good thing to have a home that wants to create a stable
base for our business.
Senator Lee. So you are saying it will result in the
creation of more creative material, whether the consumers like
that or not.
Mr. Faxon. I believe so, yes.
Senator Lee. OK. Mr. Bronfman, let us turn to you for a
minute. In 2009, EMI became a pioneer of sorts when it became,
I think, the first major label to license its music without
digital rights management, and that led, I think, to an
industry-wide adoption of DRM-free music buying and selling.
EMI was able to initiate a fairly significant change in the
industry, even though it had only 10 percent of the market at
the time.
So my question for you is: In a post-merger market, in a
market following a merger between Universal and EMI, do you
think Warner with, say, 20 percent of the market or Sony with
30 percent could perhaps be able to initiate a successful,
sequential contracting process?
Mr. Bronfman. Senator, I would like to answer that
question, and if you do not mind, I would like to comment on
the previous answer as well.
Senator Lee. Sure.
Mr. Bronfman. I think that the fact that EMI in the
instance you mention or Warner in other instances or Sony or
Universal in other instances speaks to the importance of this
competitive balance that currently exists. As the market
becomes more concentrated, as one company essentially controls
half of the hits and 40 percent of the overall market, the
ability for a third company to influence the outcome becomes
smaller and smaller.
I cannot say for sure that Warner could or could not, but,
clearly, it will be less able to tomorrow if this merger is
approved than it would be able to today.
Senator Lee. Even with its own particular market share
being unchanged from what it was.
Mr. Bronfman. Yes, because essentially at 50 percent of the
hits, Universal can do what it wants, period. Universal can say
no to anything. And so, yes, sure, Warner can say yes to
something, but at 50 percent of the hits, Universal can say no
to anything. And I would just----
Senator Lee. Would you really phrase it as 50 percent of
the hits? I mean, is that the right way to look at it?
Mr. Bronfman. Well, it was last year. Some years it is even
greater.
Senator Lee. Right. But you are not necessarily saying that
represents 50-percent market share, but----
Mr. Bronfman. No, sir. I am saying the overall market share
is 40-plus percent. A share of the hits is 50 percent.
Senator Lee. We do not want to punish them for having a lot
of hits, though.
Mr. Bronfman. I complimented Mr. Grainge to Senator Kohl. I
compliment the work that he has done. And I think if Universal
were able to get to 42-percent market share through its own
sweat and hard work, more power to them.
Senator Lee. Maybe they should be required to send some
really bad artists--I can help them find some.
Mr. Bronfman. By the way, we both manage to find some
really bad artists from time to time.
[Laughter.]
Mr. Grainge. We agree.
Mr. Azoff. I do not manage any bad artists.
[Laughter.]
Mr. Bronfman. No. You just wait for all the others to fail,
and then you pick them up.
So the notion here is that if a company can grow to
whatever size on its own and does not abuse that market
position, the Government should have no role in that
whatsoever. But when a company is seeking to acquire a market-
dominant position, Government does have a role. And in my view,
Universal is trying to seek a market-dominant position, and I
think this Committee should look at that and I hope would help
the FTC to look at it and ultimately use its influence to see
that this merger is not consummated.
And just one quick point to Roger's comment about finding a
music home. I think the issue is less about ownership than it
is about leadership. When my partners and I acquired Warner
Music, Warner had traditionally been owned by Time Warner,
which has many entertainment assets, media assets, one of the
great media companies in the world. But music within that
environment was an orphan. It was small within Time Warner. It
was not that important. And the music division was very
dispirited. Even under a private equity ownership that then
came along with me, Warner succeeded much beyond what people
thought originally, and we created a very successful company
out of that.
So I think the issue is not whether or not a music company
needs to be in a music home. A music company needs to be with
leadership that understands what it needs. And I think as Roger
described the needs of a music company, I would agree with him.
It needs stability, it needs sensitivity, it needs leadership.
But that can come from many places. It does not necessarily
only come from a larger music company.
Senator Lee. And if you could point to any one metric that
troubles you most, is it market share or is it the share of
hits in recent years?
Mr. Bronfman. It is market power, Senator. It is the power
to determine the outcome of so many different things.
You know, in the digital download world, hits are critical,
and so Universal has a disproportionate weight and market power
in the digital download world. But, interestingly, as the
subscription world--Spotify--grows, what are we discovering. We
are discovering that catalogue is actually much more important
in that world than it is in the digital download world. EMI
happens to control, thanks to the work of people for the last
five decades, ten decades, one of the greatest catalogues ever
amassed in human history. When you put that catalogue together
with Universal's catalogue, you have enormous market power in
the streaming world.
Senator Lee. But, of course, it is not about market power.
It is not only about market power. You know, the question we
have to ask is whether that market power manifests itself--
whether it is wielded in such a way that it results in harm to
consumer welfare.
Mr. Bronfman. Senator, with all respect, that may be the
question that you ask. My question is: If you grant a company
market dominance by granting them the kind of market power that
this transaction gives to them and then simply hope that they
will wield that power responsibly, I do not think that
personally is the right approach to antitrust policy.
Senator Lee. OK. My time has significantly expired.
Mr. Azoff. Can I add one comment to what Mr. Bronfman said?
Unless I am mistaken, Universal licensed Spotify first and
Warner was the last one in, number one.
Number two, when you talk about EMI's catalogue, I also
believe that, you know, what is the real worth of the biggest
thing about the EMI catalogue is the Beatles. They were not on
iTunes until recently. If you believe the printed reports, I
believe the Beatles hold, you know, a big say if not a final
say on anything that goes on digitally with that catalogue. I
do not think that the digital rights to the Beatles flow in
this deal as simply as everyone thinks.
Thank you.
Senator Lee. Thank you.
Chairman Kohl. Senator Franken.
Senator Franken. Well, thank you, Mr. Chairman. A few
things.
First of all, I do not think, in all due respect to Mr.
Azoff, I do not think that Universal was the first on Spotify.
Am I right?
Ms. Sohn. It was the third.
Senator Franken. They were the third.
Ms. Sohn. It was the third after EMI and Sony.
Senator Franken. OK.
Mr. Grainge. We were in before Warner.
Mr. Bronfman. Which makes my point, Senator. That makes my
point, which is that in this competitive, dynamic world where
you have four people supporting innovation all with different
perspectives, innovation is going to survive and thrive much
more than in a world where one person can determine the
outcome.
Senator Franken. OK. I just wanted to make that clear
because that was my understanding, and I just did not want that
to stand.
In terms of Senator Lee's point on Citigroup and EMI, you
do not think of Citigroup as nurturing, finding and nurturing
artists, but Vivendi, I might say, was a water company, then a
transportation company, and then it went into construction and
waste management, and I do not think it was a media company
until the 1990s, if I am correct. And, also, when I was at
``Saturday Night Live,'' General Electric bought NBC, and we
were run by Bob Wright, who we used to call ``a toaster
salesman.'' But he was one of the great chairmen of NBC. He did
an unbelievable job. So, you know, let us not----
Mr. Faxon. Senator, I will be sure to tell Vikram that you
think he would make a great executive in a music business.
Senator Franken. Well, I do not know him. I know Bob Wright
and he did a great job. I do not know what point I was making,
but I think I made it.
[Laughter.]
Senator Franken. Mr. Grainge, I promised you a chance to
respond to Ms. Sohn's comment on Deezer, and I would also like
you to respond to the quote I read in the Telegraph where you
said, ``If there was only iTunes providing digital music and
they tripled my sales, I would be delighted.''
This seems to undercut what I am hearing from you today
about your desire--you know, you wish nothing more than to
expand the universe of digital licensing deals. Can you explain
that seeming contradiction?
Mr. Grainge. I think that that quote was probably from 5,
6, or even 7 years ago.
Senator Franken. You have changed your mind on that?
Mr. Grainge. Well, it is probably the last time I spoke to
the Telegraph.
Senator Franken. Yes, but they have been--have they been
able to hear your phone calls or anything like that?
I do not know the British press. I am sorry.
[Laughter.]
Mr. Grainge. The contribution that Apple has made to the
music industry over this last period has been incredibly
powerful. We have since that time hundreds and hundreds and
hundreds of deals worldwide, so in terms of the evidence of
what we do and what our behavior is, I am actually very proud
of, and we will continue to deliver our music to as many people
in as many ways as we can in as many partnerships.
You have also got to remember that in this game you want to
keep as many people focused and optimistic about selling music.
And it is really important that we continue to sell our music
in every form, as well as CDs and as well as, you know, what we
call ``physical product.''
Senator Franken. Could you respond on Deezer in terms of
how that--that also seems to kind of contradict the record on
Deezer.
Mr. Grainge. Yes, I am not aware of the Deezer specifics. I
was aware that there was a problem in France. There are
problems in our business every single day of the week. There is
constant firefighting. There is so much disruption in the
industry. There is so much disruption in the technology. And in
some of the things that we are doing, we are making it up as we
go along in the same way that the platforms are. And we are
experimenting the whole time.
Again, I think to highlight----
Senator Franken. I wish I had a job as exciting as yours.
That was a joke, too, everybody.
[Laughter.]
Senator Franken. You see, it happens to us.
Go ahead. I am sorry.
Mr. Grainge. We have hundreds of deals. We manage some 80,
90 operating companies in markets throughout the world. And to
pick out two or three or four problems when we have the amount
of music with the amount of contracts with the amount of people
that we work with I think is actually unfair.
Senator Franken. OK, fair enough.
Ms. Sohn, a ording to the American Anti-trust Institute, it
took spotify 2 years to work out licensing deals with the four
majors in the U.S. and this after having had incredible success
in Europe. Sony and EMI apparently were the first two, right?
Is that----
Ms. Sohn. Yes.
Senator Franken. OK. To step up to the plate, and it took
several more months before Universal and Warner finally worked
out an agreement. This also seems to refute Mr. Grainge's point
that Universal is a leader in cutting digital deals and he
wants nothing more than to create these deals and create more
digital platforms.
Do you agree that Universal appears to have dragged its
feet in that licensing deal?
Ms. Sohn. Yes, absolutely. I mean, Spotify was very, very
slow to come to the U.S. market. It is not yet profitable. In
fact, it is quite unprofitable.
I want to actually give you two more examples. I know I
gave a laundry list before, but I think, again, they continue
to be--it is more than two or three examples, Mr. Grainge, I am
sorry to say, that Universal is the third of the four major
labels to license its catalogue to Google Music. And with Zune,
you know, Microsoft Zune, it took a piece of every single Zune
that was sold. So that is another example of either excessive
licensing, litigation, or taking a piece of the music service.
And that control is not insignificant. I do not know the amount
of the control because that kind of stuff is all under
nondisclosure agreements, but, you know, when you have that
kind of market power, it is not insignificant.
Senator Franken. Well, I really--I know my time has run
out, but I would like Mr. Grainge to be able to respond to
that. Is that OK, Mr. Chairman?
Chairman Kohl. Sure.
Senator Franken. Mr. Grainge.
Mr. Grainge. We are trying to talk about the future of
music, how fans can get music. To get into a he-said/she-said--
and I cannot speak, and neither do I think any of us can speak,
for the companies for which we are actually being told that
this is what they said or this is what we did or this is how we
behaved or operated.
Senator Franken. I think that what it speaks to is your
businesses, your companies' recent history regarding
negotiations with digital platforms when what we are talking
about here is your market power going to be so large that it
disrupts that world. I think that is why we are discussing
that, and I do not think it is just a he-said/she-said. I think
it is relevant to our discussion.
Mr. Grainge. Senator, I completely stand by everything that
I have said, that we license, we embrace as many digital
platforms and as many business partners as we can. And the
sheer thought that we would constrict these platforms, that we
would constrict who we sell to and how we sell and why we
sell--if we do not sell, we go out of business. Most of these
companies--we are not talking about nascent, small
organizations. Some of these are bigger than the entire music
industry combined. My artists will leave, jobs will go, piracy
will continue to be rampant, and it is just not feasible that
we will do anything else other--we have a duty and
responsibility to the people that we sign, and I have got a
duty to the people that we invest in as well. We make that
investment. We have to sell, we have to create, we have to
discover. And I hope you understand I feel very, very strongly
about that.
Mr. Faxon. Senator, I just wanted to add one additional
thing. The discussion of the length of time of negotiation, we
are talking about breaking new ground. The music industry is at
the forefront of where technology is taking our marketplace. It
is the pioneer. One has to walk that path very carefully. One
has to understand all of the nuances and elements that go into
those decisions.
Spotify is an interesting thing. It is a service that says:
Here is all the music in the world, take your pick, and do not
pay anything for it. And maybe--maybe--if you have these other
mobile services and other things attached, we will get you
across the border to pay for that.
Senator Franken. It has advertising.
Mr. Faxon. Yes, well, they have some advertising. If you
have been on, you know. But the proposition was free leading to
a pay tier. No one had ever done it. You did not know what the
outcome was going to be. And you are setting a structure for a
future. So you do that carefully.
But this industry has come forward and done those things.
It has done things that for many people would be inconceivable
5 years, 10 years ago. So the fact that it takes 5 or 6 months
or a year or whatever it takes to get there, the fact that we
have demonstrated that we get there is something I think is the
point to take away from this discussion.
Now, I would ask Edgar why he has not gone along with
Google Music, why he has not done those things, because I think
he has been more likely to be the last person in.
Senator Franken. Well, my time has expired. Mr. Chairman, I
would turn it over to you and your judgment.
Chairman Kohl. Thank you, Senator Franken.
Senator Klobuchar, do you want to make a comment or two?
Senator Klobuchar. Well, thank you very much, and I am
sorry for leaving, but as Senator Franken knows, we have had
floods in Duluth, we had the farm bill, but I also know that we
are also the home of many great musicians, including Bob Dylan
and Prince, as well as many other successful bands like the
Jayhawks, the Replacements, and Soul Asylum, just to name a
few. And so I thought I would quickly come back to ask a few
questions here.
Now, I know some of this hearing has focused on market
shares, competition, prices, and other economic dynamics, but I
think it is also important to consider what the impact might be
on music itself, especially given my State. I guess I can just
ask all of you this. How do you see how the merger would affect
music being available to the public, and whether it allows more
bands to get in and out to the masses and more sounds, or
whether it has the opposite effect or no effect at all?
Ms. Sohn. Well, I will start. Thanks for that question. So
four to three means less choice, and not just less choice for
consumers but less choice for artists as well. I think a great
example here is Katy Perry, who was against the merger and now
all of a sudden is for the merger. Funny how that happens. But
she was rejected by Universal, and she went to EMI, and she
loved EMI. So you take EMI away, that is just one less place
that an artist can go to.
As far as consumers are concerned, our concern is that if
you put so much power in one company with must-have music, that
they will be able to dictate the terms and dictate the survival
of every new digital music service out there. And that is not
good for consumers either because those services lower prices
for consumers, give them more choice, and are generally to
their benefit.
Senator Klobuchar. Thank you.
Mr. Bronfman.
Mr. Bronfman. Thank you, Senator. Just to say I do not know
whether past is prologue or not, but in the three mergers that
have occurred recently--well, two mergers and a restructuring
that occurred in the music industry recently--the Universal/
Polygram merger, the Sony/BMG merger, and the Warner
restructuring--I was involved in two of those three, Universal/
Polygram and the Warner restructuring. In all three of them,
the artist roster post-merger or restructuring was reduced
somewhere between 30 and 40 percent. So there were 30 to 40
percent fewer artists remaining on the artist roster at
Universal once it acquired Polygram, about 30 to 40 percent
fewer artists at Sony/BMG when they were through merging, and
about 30 percent fewer artists at Warner when we were through
restructuring.
So, again, I cannot speak to what is going to happen at
Universal/EMI, but if past is prologue, you know there is going
to be less music, not more.
Senator Klobuchar. Mr. Faxon.
Mr. Faxon. I do take Edgar's point. I think there has been
in restructurings and mergers certainly reductions in rosters.
But I think this is somewhat of a different case. EMI went
through a very difficult period several years ago under the
ownership of Terra Firma private equity company. The roster was
completely--was virtually decimated. And over the last 2 years,
we have rebuilt that roster, and it is an extremely effective
one. And what Lucian has been very clear with our staff and
with us is that his aim is to continue to build beyond that.
So we do not start with a fat, uneconomic roster, which is
why rosters are reduced. If you have successful artists, you do
not cut them out. You cut the ones that are not doing well. We
are not in that situation. We are in the building mode. And I
think our track record at the moment is extremely good.
So I take--Lucian will speak for himself, but I would take
his word for it that he is going to invest more and increase
the amount of artists on our roster.
Senator Klobuchar. OK. Do you mind if I go on or do you
want to answer as well, Mr. Grainge?
Mr. Grainge. Yes.
Senator Klobuchar. OK.
Mr. Grainge. As I have been saying, Senator, for EMI, more
investment, more music, more choice for consumers, more
platforms, and I think the point that Roger made is absolutely
spot on. Labels fight to keep successful artists, and also you
fight to keep and nurture artists that you believe in that can
be the successful ones of tomorrow. And I said it actually in
my opening statement. The company is on a really much greater
sounder footing than it was probably 18 months to 2 years ago,
and I am absolutely determined to build on the success and on
the platforms, the music platforms, the artists that are signed
within the company, to take them to the next level and to take
all the stakeholders in the entire creative process to the next
level and give them certainty and give them support and give
them investment.
Mr. Azoff. I think from the management perspective, artists
will be happy that EMI is going to be in a period of spending
more, but also in the independent sector, which has been
growing, a Calvin Harris at Ultra Records, a Jason Aldean at
Broken Bow Records, Joe Walsh last week with a number 12 debut
on Concord Records, that, you know, having less majors will
embolden artists to take more shots with independent labels,
and I think it will cause independent labels to take more risks
also.
Senator Klobuchar. The second and last question I will ask,
and I will put some more in the record, is just how this merger
could impact retailers. Why do I care about this? We are the
home of Target and Best Buy in Minnesota, and I care about it
for our customers as well. And there are some that say that
this could significantly impact negotiations with physical
music retailers that I think are very important to the music
business and had a hard time in recent years, and then others
say that obviously they believe it would not have any effect on
negotiating leverage. And if you could, maybe just one person
on each side could give me an answer to that. Mr. Grainge.
Mr. Grainge. If we do not have strong, committed music
retail, then the physical music market will disappear even more
than it has done. There are no small Mom-and-Pop kind of
stores. So many of the individual specialist chains have
unfortunately gone out of business. If we do not sell to them,
if they do not carry our music on their shelves, then we will
go out of business. So we are absolutely desperate, whilst this
market is still as high as 50 percent on physical, to do
whatever we can to support the Targets and the Best Buys.
Again, I feel very strongly about that.
Senator Klobuchar. Thank you.
Mr. Bronfman.
Mr. Bronfman. Yes, so Lucian keeps saying how much he wants
to support both digital and physical retailers, and I have no
doubt that that is true. I think the issue is on what terms.
And, again, with Universal having the market power that it
does, it obviously significantly increases its negotiating
power with WalMart, with Best Buy, with Target. It will seek
and will receive, as it has in the past in other circumstances,
a disproportionate share of promotional opportunities, a
disproportionate share of those companies' marketing dollars,
et cetera.
So it is not that I think a Universal/EMI would fail to
support a WalMart, a Target, or a Best Buy. It is what happens
in that support and how WalMart, Best Buy, and Target allocate
their dollars to the small amount of music sales that they have
currently. I think that is the issue, and that will result
either in less sales for Warner and Sony or higher prices for
consumers, or both.
Mr. Grainge. Can I just, if you do not mind, Senator?
Senator Klobuchar. OK.
Mr. Grainge. That is not the business world I live in. The
sheer thought that we can have retailers stock something that
people will not go in and buy and take it off their shelves is
insanity. So we have to provide music to them, and they will
only take music that they think that they can sell; otherwise,
they will sell Pepsi-Cola or they will sell something else, and
they will move on.
Mr. Bronfman. But to be clear, I am not suggesting that
that music will not be on the shelves. All I am saying is one
has to think about the terms on which it got on those shelves
and the terms on which other music that also would like to be
on the shelves has to take as a result.
Mr. Faxon. But can I say, let us understand, Best Buy and
Target--music is a very small part of--if you take WalMart,
Best Buy, and Target, music represents less than 0.3 percent of
their turnover. If we as an industry or even a significant
player try to raise prices in a way that is not going to
benefit--is going to reduce demand and, therefore, reduce
turnover per square foot, what is going to happen? It is a very
simple thing. And so they will resist, and we have to supply at
the terms that they will accept. And we are looking--these
stores, they look at their square footage and say, ``What is my
turn? What is my profit retention? '' And if music is not
providing it, they put something else in. We know that, because
shelf space has vastly reduced in our industry. And our prices
in the physical world have declined, and they continue to
decline even to this day. So I think this is a red herring,
frankly.
Mr. Bronfman. If I could just say, I think I agree with
much of what Roger said. It is just that he did not respond to
anything that I had said. I did not talk about Universal/EMI
raising prices. I simply said that in terms of how much
marketing dollar Target allocates to music, more of that music
allocation will go to Universal/EMI. In terms of the floor
space that they allocate to music, more of that floor space
will go to Universal/EMI. In terms of the merchandising dollars
that they allocate to music, more of that will go to Universal/
EMI. I think that is inevitable and absolutely true.
Senator Klobuchar. OK. Well, thank you very much. I had
some other questions on digital distribution and other things
that I understand have been asked, and so thank you and we will
submit some more questions for the record. I appreciate all of
you being here and thoughtfully answering these questions.
Thank you.
[The questions of Senator Klobuchar appears under questions
and answers.]
Chairman Kohl. I just have a brief question and maybe a
single question from my colleague.
Mr. Faxon, if EMI is profitable and its prospects are very
strong, as you said last year, then why should it be sold to
its top competitor? How is that in the public interest?
Mr. Faxon. Well, it was not really put to me that way. What
was put to me was that Citibank felt that it should put the
business up for sale, and it is Citibank's obligation for its
shareholders--and the U.S. Government is one of those--to sell
it at the best possible price. And Universal came forward with
the best possible price and, therefore, it is the owner.
Chairman Kohl. Yes, I understand that as a business
proposition, but in terms of the public interest, which is what
the FTC is looking at right now, if your business is profitable
and growing in the public interest--which is not the only
interest to be considered--why should we sell it to your top
competitor?
Mr. Faxon. I do not think--pardon me if this is sort of
splitting hairs. I do not think it is not in the public
interest. In other words, the word ``anti'' in ``antitrust''
implies to me that it is a bad thing for it to happen. I do not
think it is a bad thing to happen. There are many scenarios
that I could map out which I think would be good things to
happen, but none of those are available. And so this is--I do
not think this transaction is a bad thing.
Chairman Kohl. How are you going to profit personally in
the event that this goes through?
Mr. Faxon. I am going to lose my job.
Chairman Kohl. In a comfortable manner?
[Laughter.]
Mr. Faxon. I hope so.
Chairman Kohl. All right. Finally--and then Mr. Lee--Mr.
Bronfman, would it be in the public interest for this deal in
its current state not to be done with Universal but, rather, to
be done with Warner?
Mr. Bronfman. I think it is not in the public interest,
Senator, for this deal to be done with Universal. I think any
other deal will receive its own scrutiny, but on the face of
it, the largest company in the industry becoming this much
larger is wrong and it is not in the public interest.
Chairman Kohl. Senator Lee.
Senator Lee. I just have one more question. This one is for
Mr. Azoff.
We have had a lot of discussion today, Mr. Azoff, about
market power, and I just wanted to give you a chance to sort of
wrap up on this one. Tell me, in your opinion, will the
consolidation of Universal with EMI likely bring about a set of
market conditions that will result in harm to consumer welfare,
for instance, in giving the new combined merged company the
power to dictate prices, to determine the fate of new
distribution channels, or the power to dominate and potentially
foreclose sequential contracting arrangements?
Mr. Azoff. I think their power will be virtually the same
as if the transaction did not go through, and, again, I would
like to just say we are kind of riding a big wave across the
business that will have far more impact than this merger
possibly could.
Senator Lee. Thank you very much.
Chairman Kohl. We thank you all for coming. It has been an
interesting hearing, and I think it has cast a lot of light on
this deal and on your industry. Your journey has been fruitful,
and we appreciate your coming.
Thank you so much.
[Whereupon, at 4:37 p.m., the Subcommittee was adjourned.]
[Questions and answers and submissions for the record
follow.]