When French conglomerate Vivendi SA agreed to buy EMI’s recorded music division for $1.9 billion on Friday, it created a new king of the music industry.
But in a music business now controlled by digital distributors, it's not nearly as good to be the king as it used to be.
Universal Music Group, owned by Vivendi, already held 26 percent market share in the music industry, measured in terms of albums sold.
Adding EMI, which controls 9 percent, makes the company by far the biggest label around, controlling a catalog that combines such EMI assets as The Beatles and Beach Boys with such Universal staples as Lady Gaga and Justin Bieber.
“If this [deal] goes through, you’ll have one [label] that’s gigantic -- Universal; one that’s big -- Sony; and one that’s pretty small -- Warner Bros.,” said Robert Levine, author of “Free Ride,” a book on how digitization has impacted industries like music and film.
But Levine and others question whether bigger is really more powerful when digital monoliths like Apple, Google and Amazon are controlling the marketplace far more than the content owners.
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“In a business changing so quickly, market share is not as important as some people like to think it is,” Levine said.
An individual close to the negotiations noted that Apple, Google and Amazon now control more than 80 percent of legal music sales. "Does it make Universal more powerful?" asked the music industry insider. "Maybe 10 years ago when the world was different.
“Universal has been No. 1 in terms of market share for the last 10 years,” he said. “How has that helped Universal? Look at its negotiations with Apple -- Universal is not exactly in charge.”
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There is little doubt that this deal reorganizes the power structure of the industry. A little more than a decade ago, the music industry was made up of six major labels along with a number of independents. Now one label controls more than a third of the market.
But in today’s economy, the impact of gaining so much market share is murkier.
For one thing, selling albums, as just about everyone knows, is not nearly as lucrative as it once was. While the decline in album sales leveled off this year, the International Federation of the Phonographic Industry (IFPI) estimated in 2009 that 95 percent of global music downloads are illegal.
Still, there is one area where market share may still be quite significant: in negotiations with music services like Spotify.
Said Levine: “Let’s say you’re trying to launch a digital music service. Assuming this deal goes through, the idea of having a music service without this new Universal-EMI label is not much of a music service at all.”
He added: "The Beatles, the [Rolling] Stones, [David] Bowie, Motown -- if you don’t have those acts or those catalogs, I don’t see how you can do any kind of business with baby boomers without that."
But not everyone agrees that controlling a huge catalog is a winning business model any longer. Bob Lefsetz, a former lawyer in the industry and now a widely read blogger, dumped on the notion, and on the acquisition.
“What are you buying here?" he asked. "You’re not buying an active company. They have a couple of hit acts -- Katy Perry and Coldplay -- and at some point Coldplay’s deal will run out.”
Mike McGuire, a research vice president with Gartner Inc., while not quite as incredulous, was also dubious.
“They have obtained a very large catalog,” McGuire said. “Now the question is what are they going to do to exploit that, which is the existential question facing the music industry.”
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EMI has other big artists such as country act Lady Antebellum and electronic dance music superstar David Guetta, but its ability to bring in new artists has been curtailed for the past few years by its debilitating auction.
Even before Universal can try to resolve some of these issues, however, it has a series of regulatory hurdles to leap over, particularly in Europe.
Vivendi spokesman Simon Gillham told TheWrap that while the process would take a lot of work and time, the company is confident it will be approved.
Others are less sure.
Impala, a powerful consortium of independent European music labels, has already voiced its objection to the deal and said it expects it to be blocked by the European Commission for anti-trust reasons.
“Given that Brussels has taken a previous decision that Universal should not be any bigger, we would expect the sale to Universal to be blocked outright, even if it offers to increase the divestments it is prepared to make,” Helen Smith, executive chair of Impala, said in a statement. “The same would apply to Sony if it buys EMI publishing. Impala will be discussing this in detail at its next board meeting in 10 days time.”
Lefsetz added: "I'm not saying it definitely won't get passed, but you can already anticipate it will take 12 to 20 months. They will have to sell something."
This is one of many reasons the conventional wisdom was that Warner, which would not have faced as many regulatory issues due to its much smaller size, would make the deal for a figure closer to $1.5 billion.
The sale of EMI has been a contentious, drawn-out saga that began back in 2007 when Guy Hands’ Terra Firma purchased EMI without the requisite resources.
When Citigroup took control of EMI in February, it was a clear sign that a new buyer would have to step in soon.
Len Blavatnik then took over Warners in May, and analysts assumed he’d want to bolster his new company by combining it with the other "small" major.
Instead, Vivendi and Universal stepped in, believing they were acquiring an undervalued asset.
Vivendi will invest in rebuilding the labels within the EMI brand while capitalizing on certain other advantages of the deal, said on exectuive. Universal can eliminate redundancies in the two companies and conduct its business with lower costs.
At the same time, it is adding assets and generating synergy. Between its catalogs and new artists, EMI is strong in genres -- like country and classical -- where Universal is not.
These are areas, that as adults continue to embrace the digitization of music, will be increasingly lucrative.
"Financially, it’s an intelligent deal,” Gillham insisted.Related Articles: Vivendi Nabs EMI for $1.9B, Getting Rights to the Beatles, Snoop Dogg Citigroup Readies Its Troubled EMI for the Auction Block (Exclusive) Pink Floyd Ends War With EMI, iTunes' Single Sales