Universal’s Acquisition of EMI’s Recorded Music Business

In September 2012, the European Commission cleared Universal’s acquisition of EMI’s recorded music business, subject to conditions. The merger brought together two of the four so-called global ‘major’ record companies, leaving only three majors. The clearance was made conditional upon the divestment of EMI’s Parlophone label and numerous other music assets including, EMI France and EMI’s classical music labels, Chrysalis and Mute. Jorge Padilla, Peter Davis, Nadine Watson, and Urs Haegler from Compass Lexecon assisted EMI and its owner Citigroup, as well as their respective legal advisers, Freshfields Bruckhaus Deringer LLP and Clifford Chance LLP. The Commission’s decision followed its in-depth (‘Phase II’) investigation, initiated due to concerns that, as a result of the merger, Universal would enjoy excessive market power vis-à-vis its direct customers that sell physical and digital recorded music at retail level (‘platforms’). The Commission’s view was based on the notion that access to additional repertoire becomes less and less valuable the wider the repertoire already available to the platform (substitutability between majors’ repertoires). In our response to the Commission’s Statement of Objections, Compass Lexecon provided a critique of the Commission’s econometric analysis and noted, among other things, that the empirical findings were instead consistent with the repertoires of the different recorded music companies being complementary. Compass Lexecon worked with Tony Reeves and his team at Clifford Chance LLP and Thomas Janssens and his team at Freshfields Bruckhaus Deringer LLP.

In September 2012, the U.S. Federal Trade Commission also announced that it had closed its investigation of the proposed acquisition by Universal of EMI’s recorded music business. Professor Daniel Rubinfeld, together with a Compass Lexecon team led by Duncan Cameron, was retained by counsel for Universal, Glenn Pomerantz and Stuart Senator of Munger, Tolles & Olson LLP and Bruce Hoffman of Hunton & Williams LLP, to conduct analyses of competition in the recorded music industry and to provide support for Universal’s efforts to secure regulatory approval. The Compass Lexecon team studied the recorded music industry and analyzed data on recorded music sales and determined that the proposed transaction would be unlikely to lessen competition or increase prices, primarily because there did not appear to be any meaningful pre-merger substitution between Universal and EMI and because the presence of piracy likely provides substantial discipline with respect to legitimate music prices. The Compass Lexecon team also concluded that the proposed transaction was unlikely to impact prices to consumers for nascent music streaming services, or the relative bargaining power and distribution of rents between record labels and streaming services. The FTC concluded that there was not sufficient evidence of head-to-head competition to conclude that the combination of Universal and EMI would substantially lessen competition. The FTC also determined that because each of the four major labels appeared to be necessary for a competitive streaming service, the repertoires of each of the major labels are likely to be complements rather than substitutes. The FTC stated that while it worked closely with the European Commission throughout the investigation, it reached different conclusions due to different evidence unique to each jurisdiction. However, the FTC noted that while it did not conclude that a remedy was needed to protect competition in the U.S., the remedy obtained by the European Commission would reduce concentration in the U.S. as well.