Universal's Gambit Poses Peril for Music Biz

We are in an interesting period that sharply poses a key question for Americans: whether we still care about competition at all. As a recently thriving economy lies in ruins and we face some of the worst income inequality in our history, we might wonder whether our problems really have nothing to do with the rise of so many large, interconnected business firms that, with the complicity of judicial inaction, have been largely excused from competition. And even still, one after another, businesses continue to propose further, breathtakingly massive consolidations. When these things are proposed, squads of cheerleaders in the press and academia insist that they are actually good, that average Americans will benefit, rather than lose even more of their money, and that government intervention would be very unwise.

Well, here's one of the latest: a French firm called Vivendi, already a megalithic media conglomerate, has asked the Federal Trade Commission whether its subsidiary Universal Music Group may acquire EMI, one of only four remaining competitors in recorded music. Let me say that again: There are currently only four major record companies. Like, in the whole world. In a typical year, these companies own all of the music on the Billboard 100 and 90% of music played on American radio stations. The Universal-EMI firm would single-handedly hold 40% and face only two meaningful competitors.

A whole wave of digital distribution cases is afoot -- like Universal-EMI, which is ultimately about the digital distribution of music, and also like the brazen price-fixing conspiracy recently uncovered in e-books, and like Google's manipulation of search results, which regulators believe has been used to protect online advertising profits. On the one hand, those cases are just one part of the dispiriting spread of oligopoly throughout American markets. Have you tried buying a plane ticket lately? The truly arresting spike in fares follows a series of federally approved mergers, each one defended by the purported inability of airlines to compete. Bought a razor blade lately? They're now so expensive that drug stores keep them in locked cabinets, even though they are made of cheap, staple inputs. (Gillette, with about 70% of the market, is earning both profits and return-on-equity on the order of about 60%.) In one of the most remarkable recent examples, a pharmaceutical firm called Lundbeck purchased not one but both of the two drugs available to treat a heart defect in premature babies, and immediately raised the price by more than one thousand percent. The federal courts said that, as far as antitrust was concerned, that was just perfectly fine.

But the digital distribution cases have a certain special place, because they tell us something about how easily businesses can talk us into betraying our own common sense.

Times of technological transition are supposed to be good and indeed they can be, if they are not successfully exploited for bad purposes. Digital distribution is cheaper than physical distribution -- in the case of music, for example, it is cheaper to stream data to a device than to print a CD and truck it to a physical store. Elementary economics predicts that, under competition, these cost savings would benefit consumers by lowering prices. But these are also times in which firms like Universal and EMI can exploit the purported complexity of changing circumstances to obscure the obvious. That much is not new; firms have done it as long as we have had antitrust. Hence we hear that record companies must merge because they still suffer from the death of physical recording media. They cannot compete in this new digital world, in other words; they are victims of competition. We also hear that their ability to raise prices will be limited by piracy and by the buying power of online music distributors like Apple and Amazon.

Don't believe it. The immediate future of music licensing competition seems to be in online distribution venues offering unlimited variety, like Spotify, Rhapsody, or Pandora. Those firms cannot survive if they can be excluded from very large libraries of titles. Hence the beauty for firms like Universal and EMI in yet further consolidation -- more power to extract high royalties from online distributors, and more power to keep the gains that otherwise would be competed away through technologically superior distribution.

If we actually believed in competition, we would say this: If there really is only room for three companies holding rights in almost all recorded music, then let one of them die. One of the simplest predictions of textbook economics is that when there are too many firms in a market, then some should exit. But given that Universal wants to pay a tidy little price for EMI, rather than let it die, you can be pretty sure the four firms could easily persist in the market. Universal's real motive is that it is more profitable to own EMI's catalogue of music than it is to compete with that catalogue.

That transactions like Universal-EMI can even be entertained without automatic illegality proves that things have gone a little crazy. One can hardly blame the enforcement agencies, and I do not; they must cope with a federal judiciary very hostile to antitrust. But if the Commission should sue to block any merger, I humbly submit that this should be a good candidate.

I represent no party with any interest in this matter and I have received no compensation for this opinion.