Industry consolidation and competition

So, EMI will disappear as an independent company, a record label that has contributed much to the music industry. Somehow, it is the end of a legend. However, when one examines the last years of EMI, its fate ought not to have come as a surprise. There is nothing unusual about these developments, it's happening in all industries, but this time, the nature of the disappearance makes us listen attentively, says KLAUS OESTREICHER, Professor at IPE Management School in Paris.<[sna>

A few weeks ago, a journalist intimated that it's time to "finish off the record labels." A challenging statement, easily made. There may even be some sound reasons, but is it really so easy? Certainly not. Of course, artists can offer their songs and productions directly to consumers, circumventing the industry's supply chain. A few artists may even make good money, but the majority of them does not, except for the pride of seeing their name on Google. But such idle view does not pay the bills!

A music label like EMI sorts out the creators from the interlopers, applies standards, handles marketing and distribution. While a number of musicians are successful on their own, most of them are not. When an artist is in a record label's hands, this voyage through the supply chain is usually much more professional. That is a difference which cannot be overlooked or minimised.

What would happen without the music industry? The associated jobs would not be around. Though in these troubled economic times, the music industry’s workforce is a casualty all the same.

With a few exceptions, consumers do not buy a 'label,' but a music or an artist. So, what would happen without the labels? Spotify, hulu and youtube replace them? Surely, they do it already, but only to a certain extent.

Fundamentally, only record labels protect musicians. Who will stand up for their intellectual property rights, royalty and revenue collection? Who will fight against piracy - a lone artist against the many millions of 'free' downloads? Conceivably, individual artists could come together to protect their interest, but it is doubtful such a grouping be strong enough to make a difference. A powerful music label will ultimately protect even those artists without a record contract, since legal barriers are high and they manage to at least prevent total download anarchy.

There was a time when five major record labels dominated the music market, then reduced to four when Sony merged with BMG. Now, there will be just three. At this writing, there are still anti-trust barriers to overcome. But look at the computer processor industry. Intel is number one, then far behind is AMD. Anybody knows who is number three?

And what about Windows? The Redmond company still dominate the PC operating system market, and did it for a long time. Linux is very small in comparison. Though many consumers do not like Windows or Microsoft, they use it nevertheless. Linux's Open Office is offered for free, like downloads, but consumers prefer Windows' MS Office instead. They feel more comfortable connected to a large overseeing company like Microsoft, than left isolated, on their own, with Linux. This comparison is not so far off from the situation in the music industry.

Anti-trust regulations have done little to prevent such concentration of market power in the hands of one or a handful of players in other industries. So, why should it be different in the music industry? After all, consumers are free to choose to use free software, like Open Office, but most continue with MS Office. It is fundamentally about industry standards.

But, it is also about a different competitive pattern. Should the music industry remain in the hands of three major players? This is the old patterns of competition, a dangerous concentration in the hands of very few. Today, the competitive paradigm is different. Competition has found another, much fiercer, battleground than the horizontal competition among music labels.

The new battleground pits labelled music against free downloads. Under this new paradigm, consumer choice is no longer confined to a selection amongst music companies and their catalogues. Consumers can now purchase labelled music from publishers or access downloads directly from artists (let's call it 'public').

This new deal ought to modify the terms of the debate. The question is thus whether the regulation of competition must not start respecting the terms of a new and different horizontal competition: industry vs public offers.

Finally, an underlying question is whether the public offers of direct downloads are causing the music industry's contraction and concentration. Certainly, synergies and ever increasing efficiencies have to be faced. But "finishing off the record companies" is a dangerous slipping slope. Regulatory authorities have to see to it that the world remains a competitive place to meet different consumption patterns.
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