Universal’s EMI gambit

Universal Music Group is the largest of the four major record companies, and its proposed purchase of EMI Music would make it even larger. With piracy rampant and a handful of big retailers responsible for much of the remaining sales, Universal argues that there’s no harm in letting it swallow up EMI, by far the smallest of the major labels in the United States. But the online music stores and services such as Spotify that are helping the industry regain its footing could be harmed if the merger lets the newly combined companies command disproportionate licensing fees. That’s why regulators should approach the deal with caution.

With CD sales in free-fall, the record companies’ future clearly rests with new digital formats, mobile devices and business models that focus on generating revenue from listeners who don’t necessarily want to pay 99 cents per song. Meanwhile, the barriers to entry into the music business have been obliterated, and artists no longer need the ministrations of a label to record, distribute and market their work.

One thing that doesn’t seem to be changing, though, is the major companies’ dominance when it comes to distributing the most popular music. Last year, all of the songs on Billboard’s annual Hot 100 chart were distributed by the majors, and more than 90% of the songs played on the radio were major-label releases. As a result, the online and mobile companies that are replacing the Tower Records of yore still need the major labels’ libraries to succeed. And they have to negotiate with the labels for the rights to the songs they want to sell or stream on demand.

To its credit, Universal has evolved from a reluctant partner into an eager licenser of its catalog. But its position at the top of the market has made it an aggressive negotiator, knowing full well that a service such as Spotify or Rhapsody that offers access to an unlimited amount of music wouldn’t succeed without such a large share of the top songs and artists. Consolidating the industry further would give Universal even more power to set terms and to block upstart services it considers too risky, too disruptive or too threatening to other Universal partners. With the addition of EMI’s library, Universal would own the labels behind about 33% of the recorded music in the United States. It also would hold distribution deals for an additional 7%, many of which make Universal the licensing agent for the labels’ tracks and artists.

Universal argues that it won’t be a roadblock to new players because it can’t afford to be. It has a point — the major labels have to change to stay alive. Nevertheless, the Federal Trade Commission, which is reviewing the merger, should consider the potential impact on online and mobile distributors carefully. If their costs climb because the merged company has the leverage to extract even higher fees, or if they can’t enter the market because of Universal’s lone opposition, consumers will end up paying the price.