EMI, the British company, has been a driving force in the music industry since 1887, when Emile Berliner invented the Gramophone. Since then, EMI has broken into many fields, including publishing and recording, and has always been considered a top competing company.
Last month, on Friday November 11, 2011, it was announced that EMI had been sold in two parts – the recording division to Universal Music Group (UMG), and the publishing to Sony/ATV Music Publishing. With this sale made by Citigroup Inc.—EMI’s parent company and primary banker—the big four power companies of the industry, Warner, BMG, Universal, and EMI, have now been whittled down to three.
EMI’s Tumultuous Past
The problems for EMI started in August 2007 when a private British equity firm, Terra Firma Capital Partners, took control of EMI’s shares and the company. It was under Guy Hands, the founder of Terra Firma, that the deal went through. Analysts say that it was bad business. EMI had a lot of debt, which was why the buyout took place. Moreover, digital music and piracy were on the rise, which took their toll on the label’s profit. Terra Firma ended up losing around $2.5 billion1.
This led to Citigroup Inc. seizing control of EMI from Terra Firma in February 2011. Terra Firma had gone into debt and was unable to pay their primary bank, Citigroup. Citigroup announced that they would be putting up EMI for auction, and since February there had been a lot of interest. Before Universal and Sony bought EMI from Citigroup, the Warner Music Group was perceived as the likely buyer.
One of the Big Four
Before the merger, EMI had been one of the last major labels and publishers in the industry. EMI had control of about 9.15% of the United States recorded music market2. EMI Music’s roster of artists is large and varied and includes The Beatles, Katy Perry, Coldplay, Norah Jones, and Lady Antebellum. However, EMI Publishing is the more profitable asset of the company. The publishing side of EMI made up about 45% of their profit. Also, the catalog includes over 1.4 million songs. It is one of the most valued and large in the industry. EMI held the publishing rights to songs like “New York, New York”, “Over the Rainbow”, “Have Yourself a Merry Little Christmas”, and all of The Beatles albums, which were just released on iTunes this past year.
EMI was sold for a total of $4.1 billion; Universal bought EMI Music for $1.9 billion, while Sony bought EMI publishing for $2.2 billion. However, in the deal Citigroup is still in charge of EMI’s 21,000 employees’ pension plans, which will cost anywhere from $200 million to $600 million3.
Now that the merger of EMI has taken place, there is going to be a dramatic change in the industry. The big four have now become three and there is a shift in power. In 2010, Universal and EMI had about 40% of the music market4. Universal Music Group will now account for about one-third of all music sales worldwide, making Universal the world’s largest music company.
Sony is going to be acquiring one of the largest music libraries in the industry, giving them more control in the business. Overall, with the industry changing and the major labels being affected negatively, publishing is one side of the industry that has come out on top and survived the increasing issue of piracy. Movies, television shows, commercials, and sport programs will always need music to enhance their programs. Publishing companies that have a broad library, like EMI had, will always be in demand throughout the industry. Sony has now further solidified a major place in the music industry for itself with the buyout of EMI Publishing.
The merger of EMI’s artists and catalog, with Universal and Sony respectively, has created a swarm of different reactions within the industry. Independent labels fear that a concentration of ownership, which Universal now has, is going to decrease their presence in the market. Also, independent labels argue that if Warner, instead of Universal, had merged with EMI then the market would have been more even, because Warner would have controlled less then 40%.
Some might ask why did the Warner/EMI merger not go through? When major music companies merge, the United States and the European Commission have to approve the merger because they want to prevent monopolies from forming within the industry. Usually, they will approve it, but with some conditions, such as selling smaller parts of the company or other provisions in order to insure fair competition within the market. In the proposed merger between Warner/EMI, the European Commission demurred, influencing Warner to withdraw its interest. Independent labels are now concerned whether the United States and the European Commission will actually let the merger between EMI and Universal go through, and what precautions they will take in order to ensure that a monopoly will not occur. Impala, the Independent Music Companies Association, filed a complaint about the merger with the European Commission5. As of now, there has been no official decision made.
Another concern that has been noted is whether the smaller artists that belong to EMI Music will be lost in the shuffle, not represented properly, or dropped all together. Some think that Universal is too large a company to pay close attention to the smaller artists that are not making as much money for the label. Others argue that the merger is a good thing for artists and that they will do better when represented by Universal, because of their overwhelming reach within the industry. Only time will tell what is to become of these smaller artists.
Conversely, there needs to be perspective placed on what this merger means for the industry. At a time of transition, it is difficult to tell how the merger is going to affect the industry overall. There is an overwhelming amount of piracy that has been increasing over the past ten years, which has led to a decrease in the power of the major labels. Record labels’ sales have been cut in half also because of the shift from album to single song purchases. Digital sales have accounted for about 29% of recording companies’ revenue this past year, a number that could be larger. Regulators may still look askance at the merger because the record labels are hurting anyway. Overall, the consolidation of major companies within the industry has gone from five to three within the last twenty years. More of the majors are giving up and packing their bags—a worrisome development.
by Haven Belke