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Universal Music Group Purchases EMI's Recorded Music Assets for $1.9 Billion

By Tyler Mazey

In a widely reported sale, Vivendi's Universal Music Group (UMG) purchased EMI's recorded music assets at auction for a price of $1.9 billion. However, UMG did not pickup EMI's valuable publishing assets, which were bought for $2.2 billion by a group of investors led by Sony. This split and sale raises a host of issues that look to change the face of the music business in its entirety, including the future of the recording industry, government approval, and current and future licensing deals.

Sale

UMG's purchase of EMI's recorded music operations leaves only three major record labels. It also creates an interesting difference among the three. Prior to the purchase, UMG had close to $6 billion in revenue, Sony had $5.7 billion, and Warner had $3 billion. EMI had $1.8 billion in revenue according to annual reports from March of 2010. (http://www.nytimes.com/2011/11/12/business/media/emi-is-sold-for-4-1-billion-consolidating-the-music-industry.html) With the addition of EMI's, UMG will control close to 40% of the market share in recorded music.

Even though CitiGroup was not able to recoup its entire EMI purchase price from a decade ago, some say that UMG overpaid for EMI's recorded music operations. Warner was a major participant in the EMI auction, but balked at the apparently exorbitant price tag. Warner's purchase of EMI would have been a significant deal, putting it closer to the same market share as the other two majors. Considering that EMI would have been a nice jewel in Warner's crown, one can assume that the value of the assets was not nearly as high as the price UMG paid at auction. Even though consumers are no longer purchasing recorded music at the same levels as they were at the turn of the millennium, record labels are still being purchased at near millennial prices.

Assuming EMI's recording assets were overvalued as a separate entity, those assets still provide an exciting opportunity for UMG to leverage its combined market share in the face of an uncertain digital future. Greater market share creates the opportunity to generate greater revenues from on-demand digital music services. While some independents may be pulling catalogues from services such as Spotify, Rhapsody, and Rdio due to miniscule royalty payments, UMG has the largest catalogue. This leads to the possibility for an extraordinary amount of royalties once a true leader is crowned in the on-demand digital music streaming sector.

Government

While increased market share can help UMG to lead online, that same leverage creates an intense amount of government scrutiny. In Roger Faxon's memos to his staff, he even mentions that "Universal will need to clear the necessary hurdles before they can take ownership. And that too will take time and effort." (http://www.billboard.biz/bbbiz/industry/record-labels/read-emi-ceo-roger-faxon-s-memo-to-staff-1005510952.story) UMG is already planning to divest $500 million in recorded music assets in order to clear regulatory hurdles in the U.S. and Europe. However, Europe's Independent Music Companies Association (IMPALA), expects the deal to be blocked outright, even with this divestment. IMPALA's argument is that the last time the European Commission looked at the company, it ordered UMG to sell off assets to cut itself down to an "acceptable" size. Since that time, UMG has grown substantially and has additional ties with concert giant LiveNation. This would make it less likely for the European Commission to approve UMG purchase of EMI's recording assets. (http://www.billboard.biz/bbbiz/industry/record-labels/impala-says-it-expects-emi-universal-deal-1005511552.story)

UMG's position is therefore quite tricky. It is purchasing EMI to create a bigger, bolder company, but will have to divest assets in order to make that happen. UMG can cut less valuable assets out of its catalogue, but still has to deal with the regulatory and restructuring process. Taking the time and money to jump through regulatory hoops takes valuable investment income away from the core corporate function of finding and developing new artists.

Present and Future

All of this legal hassle will affect the profitability of EMI until it is completely integrated under Vivendi/UMG umbrella. Faxon has said that EMI's continued obligation through the transition period is to continue to drive each of the businesses to the best of EMI's ability. Given the regulatory hurdles to overcome, business is likely to continue as usual until through the fiscal year. EMI will continue to make deals, invest in artists, release records and enter into licenses. There will be no layoffs throughout the transition, and interaction between EMI and UMG is strictly limited until the sale is approved. Therefore it is expected that present deals will not be affected. (http://www.billboard.biz/bbbiz/industry/record-labels/read-emi-ceo-roger-faxon-s-faq-to-staff-1005513552.story)

While it is business as usual for EMI during the transition, its future will likely be significantly altered by the sale. One can assume that UMG will want to consolidate and synergize EMI with existing operations in order to reduce overhead. This will mean layoffs and possible disruptions in the artist release cycles. However, this is not UMG's first rodeo.

Once past the regulatory hurdles and consolidation, UMG will have close to 40% of recorded music market share and be able to flex its muscles. UMG will be able to dictate licensing rates to the rest of the industry; if you want a UMG song, you will have to deal with a UMG price. Having almost 40% of the market cornered may make it difficult for music supervisors to find easy replacements for the plethora of music licensed, creating difficulties for many industries, such as television, movie and commercial ad placements. Music supervisors are under tight budgets and even tighter schedules. Increased rates could throw a big wrench into the way they do business. While there is other music available, UMG's giant market share will make it more difficult to find less expensive alternatives.

There is also the tricky issue of the on demand Internet streaming services. Most of these services survive off of the licensing deals made with the major labels, and if rates go up, profits may never be seen. However, UMG can flex its muscles in order to choose a winner in this space. Considering that most of these services pay based on market share, UMG stands to gain a significant advantage in terms of revenue streams and negotiating power.

Conclusion

As the Internet Age continues to eat away at recorded music revenues, UMG will need to lead the rest of the industry into the future. One thing is certain; UMG will be in a position to make or break the recording music industry. Although record labels were the technological leaders of the past, it now seems as though the major labels are technology followers. Having close to 40% of recorded music market share gives UMG the ability to choose winners and losers. UMG needs to flex its market share muscles for its artists, shareholders, and the future of the industry. Otherwise, UMG will be creating a bleak tomorrow for its own business and the businesses of its peers.

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This page contains a single entry from the blog posted on November 17, 2011 12:56 PM.

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