by Alyssa Oursler | September 25, 2012 9:25 am
It’s official. Regulators in Europe and in the U.S. approved a merger between Vivendi’s (PINK:VIVHY) Universal Music Group and Citigroup’s (NYSE:C) EMI Group.
The new Universal will now control nearly 40% of the music market (although the EU is making EMI divest some of its assets), shaving the number of companies that lord over nearly 90% of the market from four names to three. The other two big players in the biz: Sony (NYSE:SNE) and Time Warner‘s (NYSE:TWX) Warner Music Group.
The resulting outcries have been dramatic and loud. The Huffington Post, for one, warned that such a merger essentially will “convert the current oligopoly effectively into a monopoly, with a single company determining the commercial viability … of the music space.”
For many investors on the delivery end of music, though, the news should be met with a shrug, if that. Let’s take a look at three of the biggest names — Pandora (NYSE:P), Sirius XM Radio (NASDAQ:SIRI) and Apple (NASDAQ:AAPL) — to see why:
At first glance, it would seem that Pandora should be shaking in its streaming boots. After all, as HuffPost puts it:
“Over the past decade, major labels have used their market power to extract wildly expensive licensing agreements from new digital services — pricey enough to render almost all of them unprofitable. Pandora lost over $16 million last year, while Spotify lost more than $55 million.”
But while it’s true that Pandora shells out nearly half of its revenue on licensing fees, a major detail is being overlooked here: Pandora doesn’t negotiate directly with music labels.
Instead, the company’s rate was the result of federal legislation — and actually was a giant improvement from the previous deal (or lack thereof) that almost led to Pandora’s demise a few years back.
Likewise, its future rates also will be determined in Washington, not in a meeting with Universal and friends — probably why Pandora didn’t spend time protesting the merger, but instead spent the past few years lobbying in the nation’s capital. It made some headway earlier this week when a promising bill regarding Internet radio royalties was introduced.
Satellite radio company Sirius XM Radio seems to have everything a digital service could dream of: rates that are limited by Congress and that are determined with the help of a negotiating agency — meaning it couldn’t end up spending 50% of its revenue on royalties like Pandora does, and it doesn’t have to negotiate directly with labels like Apple or Amazon (NASDAQ:AMZN) do.
But Sirius actually has filed a complaint against its negotiating agency because it wants to deal directly with record labels. According to Sirius, going straight to the labels actually would give the company greater flexibility and a price advantage.
Are the big, bad labels not so bad, then?
Some of the biggest reasons the merger isn’t a big deal, though, unsurprisingly come from the biggest player in the game: Apple.
To start, Apple’s dominance in the online music industry has made it the tail that wags the dog. Since the days of Napster, U.S. sales revenue for major labels fell dramatically — until they finally grew again last year, in large parts thanks to the popularity and ease of use of the iTunes service.
In fact, Universal’s CEO Lucian Grainge summed up the relationship quite simply: “If Apple stops selling our music, we go out of business. Apple does not.”
Forbes touches on this side of the coin, adding that the company’s dominance could actually incentivize labels — even the most dominant label of all — to make music widely and easily accessible so their hand isn’t forced by the true powerhouse of the industry.
Plus, the dominance of Apple also brings to light another issue overlooked by the doomsday merger crowd: If labels do indeed try to jack up prices to distributors, and those prices are then passed along to consumers, consumers could very well be motivated to pirate the product again — as they did during the many years labels saw falling sales.
Again, that makes more outlets — and reasonably priced ones — something labels should want.
If nothing else, the music industry is much more complex than a simple equation of “bigger company equals bad news for all” in the supply chain; countless nuances complicate any straightforward cause and effect.
And even if you did argue that Universal will use its newfound power to thwart the efforts of any digital startup, well … that could actually bode well for the players already in the game, as it means less competition.
So music investors, take note: You have much bigger things to worry about than the Universal-EMI monopoly effect, no matter what the headlines scream.
As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.
Source URL: https://investorplace.com/2012/09/the-universal-emi-merger-no-biggie/
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