Universal Music’s Answer To Piracy Is Monopoly

Umg-monopoly-headRefe Tuma is a writer, thinker and strategist with a passion for the new music industry. Follow Refe on Twitter to join the conversation, with topics ranging from economic theory to social media.

Universal Music Group seeks to merge with EMI to create a super-label monopoly so big that even piracy can't stand in its way. What does this mean for innovative digital music services, and for listeners? (Hint: nothing good.)

I came across a fascinating statement in an article covering the proposed merger between Universal, the word's largest record label, and third largest label EMI:

"No one at Universal wants to go on the record but those close to the company have a clear message … they argue that Universal-EMI's 40% share and pricing power aren't the real issues when there is rampant piracy, an abundance of free music on the internet, and Apple, Google and Amazon have muscled onto their turf."

In other words, the already dominant Universal believes it needs a monopoly in order to survive the digital economy. At first glance, this seems like quite a leap. How could piracy and free music possible justify the monopolization of the majority of the world's music catalog? I wasn't sitting in the board room that day, but I think I can shed some light on how Universal got from point A to point B:

Inside the Universal Music Group war-room:



Click image to enlarge.


Monopolies are not good for free markets. Why? Because they prevent prices from adjusting naturally to changing supply and demand. They prevent market disruption by eliminating competition and creating an environment that is hostile toward entrepreneurship and innovation. That is exactly what Universal wants.

Solving the digital music problem?

According to their logic, piracy and digital file sharing have already destroyed the supply-demand balance. Even though demand for music has remained steady throughout the industry's transition to a primarily digital market, prices have dropped substantially or disappeared all together. Digital distribution allows for infinite copies of an album or track to be produced, and it is impossible for demand to catch up. The market needs a monopoly that has the power to exert control over prices so that digital music can remain a viable product.

Economically speaking, there isn't a straightforward solution to the infinite-supply problem. Generally, when there is excess supply of a product, production would slow or stop. Nobody wants that to happen with music – not musicians, not listeners, and certainly not Universal and the other labels! Only an artificial metering of supply could drive prices back up, assuming that demand remains constant… which happens to be exactly what monopolies are designed to do. Ah, corporate logic.

Of course, even if you buy Universal's reasoning there are big problems with this plan. It would certainly have unintended consequences, and could even backfire entirely by resulting in even more file sharing and piracy of the label's catalog.

Monopoly and innovation

The first thing that a Universal-EMI super-label would probably do is to raise the already steep royalty fees for online music services like Pandora and Spotify. Universal has already set a precedent for this. In 2011 it tried to shut out French streaming site Deezer from using its catalog. The Paris high court decided against Universal, and their ruling is telling:

"The refusal to supply the catalogue, following the refusal to accept the conditions of Universal, which differed from those contained in previous contracts and in contradiction with the commitments made during the agreement of January 2011, constitutes in itself an abuse of a dominant position […]

"It cannot be contested that Universal's catalogue is most important from both a quantitative and a qualitative perspective, as it contains 50% of the Top 100 titles. It can therefore be considered as an essential and thus indispensable element for the size and coverage of the platform."

If Universal had a dominant position then, imagine the influence they would have after acquiring EMI! This is not good news for streaming services, or any of the other innovative music services out there today. Streaming business models have already proven difficult to sustain under current rates; if those rates increase the Pandoras and Spotifies of the world will find themselves in a very precarious spot.

Pouring gasoline on the fire

This is obviously bad news for listeners, but as I mentioned above it would likely come back to bite Universal and EMI as well. If recent history has taught us anything, it is that if listeners can't find the music they're looking for on legitimate platforms they are more than happy to download it from wherever they can find it.

"Restricting innovation in the digital music space will actually increase the amount of infringement, by (1) making it unprofitable for most companies to be in that space and (2) limiting true innovation and the necessary competition among services that leads to the kind of new innovations that consumers want. Instead, it'll just drive them to go back to what works: open infringement." – Techdirt.

A super-label would not only fail to accomplish its own stated goals, it would be disastrous for the digital music industry as a whole. If recorded music is going to remain a viable product (or re-emerge as one, depending on how you ask) it will take legitimate, innovative solutions. That will be more difficult than ever to accomplish under a monopoly like the one Universal and EMI are proposing.

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  1. I agree and I pretty sure that this oligopoly is even more pervasive in physical distribution; However, it’s pretty clear that the Haliburtonization of the US entertainment sector will go on unreported.
    It might be because of comments like this: “Even though demand for music has remained steady throughout the industry’s transition to a primarily digital market, prices have dropped substantially or disappeared all together”.
    HELLO…… CD’s are still 67 percent of total music sold -that’s some transitions period.

  2. I think your stats are a couple years old. According to Billboard and Soundscan digital sold more than CDs in 2011 and have continued to gain market share since. Unless you’re talking about your own distribution numbers?
    Either way, this post is about Universal’s proposal to merge with EMI, comments they have made about piracy and free music online, and how this might affect online music services and listeners. It’s not primarily about CD or download sales. A merger between the 1st and 3rd largest record labels would certainly have a significant impact on both of those types of distribution, but that’s not what this post is about.

  3. I have some gentle, respectful pushback for you.
    There are a few very legitimate and valid reasons why consolidation makes sense, from the perspective of business strategy. Pricing power does not make the top 5.
    The functions of a record label in 2012 include the following: distribution, radio promotion, tour promotion, and artist development. Several of these functions exist in their current state because the size of the business was previously able to fund them. As revenues shrink, we now have infrastructure that was created for very large businesses – with its incumbent overhead – supporting medium to small businesses. Reducing staff is only a temporary solution. The concept of scalability applies here – I’ve built out the technology to execute digital marketing and distribution, and even A&R, and as I add artists who generate $1 in revenue, my costs only increase $0.05.
    Therefore, it makes a lot of business sense, especially in a contracting industry, to consolidate.
    This is not a new concept, and it is not a conspiracy to bury innovation. Look at your CD manufacturing businesses – there used to be 10, now there are 2, and the reason is both reduction in capacity and consolidation.
    As for your infinite supply theory, I find little merit in the abstraction. Plainly, there is a copyright protection in the United States, and because of that protection, businesses used to invest large sums of money to produce the superstar artists that the American public craves and demands. That was the original intention of the law, in fact. To promote the commerce of art. Regardless of the distribution mechanism of the file, the fact is that a musical product is the result of a large up front investment, and costly marketing. It is no coincidence that the most pirated digital content is that content which carries the largest marketing budget.
    Copyright protection does not protect a physical disc, or a digital file. Copyright protection protects distribution of the sonic experience. And the DMCA, unfortunately, protects websites that enable illegal distribution.
    Innovation can occur in a digital environment. I would posit that piracy, and the lack of tools available to content owners to effectively police said piracy, is as large a factor in the shuttering of digital music innovation as any other factor. If copyright’s intended protections were upheld, we would see large investments in innovations all things digital. Why would you invest in something that holds little to no economic promise?
    I’m not saying that the industry is virtuous. I’m not saying that the executives of large record labels make great decisions. I’m not saying that the executives of large record labels don’t have primitive and draconian views. I happen to think that the industry’s major players are much too conservative when it comes to innovation and should – at least now – make it much easier for entrepreneurs to build digital music businesses. But that opinion has nothing to do with an argument against consolidation.
    I am saying that consolidation is a very sensible and logical next step in a contracting industry. And I’m saying that ignoring copyright protection, its intention, and the fact that a crucial and related law’s specific purpose is being circumvented when making an infinite supply argument would get you an F in any economics class worth its salt. As would calling an industry with 3 incumbents, each with over 15% market share a monopoly.

  4. It seems Universal Music Group has been focused on industry control, to be in a stronger position to retain its roster and entice new talent.
    In September UMG created a formal alliance with Live Nation to handle its artist management. The world`s largest record label is now directly involved with the world`s largest promoter, venue management, and ticketing service (Ticketmaster).
    This industry control and consolidation will not impact piracy… having or controlling a larger share of the pie does not mean you are better prepared to protect it from thieves. This concentration will discourage artists from leaving UMG and seeking other distribution partners.

  5. What scares me most is that Universal Music Group is the worst of the major labels in terms of handling its catalog. While they expend huge amounts of energy policing consumer music acquisition, there are huge holes in their CD catalog, titles that anyone with half an ounce of music knowledge would expect to be in print. This does a huge disservice to consumers and the artists they supposedly represent, especially for older artists who could be on the verge of rediscovery if they had music available.
    If a company wants to police consumer music acquisition, they should keep the titles available. Licensing through iTunes or Amazon is not remotely the same thing as selling the discs.

  6. With all due respect, some of the comments are just ignorant. First and foremost, the premise of this article is based on a fallacy. Grasp the concept Refe, EMI is going out of business. There is no white knight in their story; Warren Buffet isn’t going throw money at this puppy to save it for sentimental reasons. The music business is a bad risk for traditional investors. Guy Hand tried and failed, therefore only 3 logical buyers can realistically purchase this company and benefit from economies of scale. Guess what? We live in a capitalist society, and growing a company and saving jobs means strategic alliances. Suspend for a moment your perspective of the music industry, just think of it in terms of an American business working in this economy. What this really all comes down to, is that many of you don’t want to pay for music. You feel entitled to get it for as little money as possible. Consider Apple; all of you have bought into their marketing mojo. Apple is a company that sells a hugely marked up product built in China. Why do you think they have a 100 billion sitting in the bank? When was the last time you saw an Apple product on sale? NEVER! But you’re not protesting Apple, you’re not calling them greedy or monopolistic. Apple can buy EMI in a heartbeat – chump change to them, but they won’t. Everyday, everyone reading this blog, your biggest problem is the greedy music industry. Well get over it. The industry is in the dumper and all of you out there won. Happy? You can now get all the music in the world for free. Congratulations. Now why don’t you shut off your computers and protest something worthwhile like higher gas prices, bank foreclosures or some greedy computer company shipping jobs overseas.

  7. If we analyse this fusion only from an economic point of view, there’s no doubt a monopoly it’s going to do a big damage. When there’s no alternatives in the market the consumers are the one paying the toll. The fact that a fusion between Universal and EMI (which now is out of date, but we can still use it as an example to analyse the general phenomenon) could be seen as a sensible and coherent option from a business point of view doesn’t change the fact that, eventually, is music we are dealing with and it’s music that will suffer the biggest detriment in the end.
    It’s bad enough that an art form has been turned into a product grossing billions; the least we can do, in my opinion, is boycotting any attempt to facilitate this process even more.
    After all, let’s not forget that the 3 major record labels (Sony,Universal and Warner) are the one feeding us rubbish like Kanye West’s new song “Bound 2” (Universal in this specific case, but the others are not any better) and expecting us to swallow it and say thanks.
    What the music industry really needs is a redistribution of wealth and resources and I believe we only have radicals means left at our disposal.
    If Universal Music’s answer to piracy is monopoly, than it seems pretty clear to me what is the answer to their monopoly…

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