Steve Redmond on the price of music's biggest deal

Monday 6th August, 2012

Behind the retail silence on the Universal-EMI deal

ERA does not have a position on Universal's proposed £1.2bn purchase of EMI.

That is not to say that retailers think the deal is a good idea. Like most people in the music industry retailers have tended to view it as benefitting no one but Universal. Their pragmatic view, however, has been that given that someone has to buy EMI, and Lucian Grainge clearly wants it so much, then it might as well be Universal.

In other words, it would be wrong to interpret ERA's decision not to oppose the takeover as indicating support for the deal.

This stands to reason. Few retailers in any market could be expected to support a development which further strengthens the hand of their biggest supplier.

Regardless of this, out of respect for Grainge, and acknowledging that Universal in the UK under David Joseph and Brian Rose has been among the more retail-friendly of the majors, they have stayed their hand.

There are indications, however, that the more the Universal-EMI soap opera unfolds, the more concerned retailers are becoming.

Their biggest concern is that the deal represents a massive distraction and potentially huge diversion of resources at a time when the recorded music business is facing the toughest of times.

In the first half of 2012 the UK music market as measured by ERA declined by 10.5% in volume. In the core CD albums market, sales were down by nearly 25%.

It is no exaggeration to say that music's very existence in retail stores is in jeopardy.

Which makes the decision to stake so much on a takeover of EMI, a move which is about increasing market share rather than sales - seem all the more like the answer to a question only Universal is asking.

Setting aside the £1.2bn purchase price of EMI, the transaction costs of the deal - the PRs, the lawyers, the lobbyists - have so far been estimated at somewhere north of £100m.

Reuters correspondent Jeffrey Goldfarb last week estimated that Universal's latest proposal to sell Parlophone in order to satisfy competition authorities could cost it an additional £125m to £250m.

Goldfarb speculates that Universal is now nearing the point when it would be cheaper for it to abandon its bid for EMI rather than proceed. He may be right.

But the issue for retailers remains that Universal seems willing to invest a minimum of £100m and perhaps up to £350m on an excursion no one believes will sell a single extra album.

After one of the quietest first-half release schedules in recent years, how much healthier they are beginning to ask would the music market be if Universal had instead invested that money in developing new artists and new products?

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