    [Senate Hearing 112-550]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 112-550

      THE UNIVERSAL MUSIC GROUP/EMI MERGER AND THE FUTURE OF ONLINE MUSIC

    =======================================================================

                                    HEARING

                                   before the

                           SUBCOMMITTEE ON ANTITRUST,
                     COMPETITION POLICY AND CONSUMER RIGHTS

                                     of the

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                          ONE HUNDRED TWELFTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JUNE 21, 2012

                                   __________

                              Serial No. J-112-83

                                   __________

             Printed for the use of the Committee on the Judiciary

                      U.S. GOVERNMENT PRINTING OFFICE

    76-045                    WASHINGTON : 2012
    -----------------------------------------------------------------------
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    20402-0001

                           COMMITTEE ON THE JUDICIARY

                      PATRICK J. LEAHY, Vermont, Chairman
    HERB KOHL, Wisconsin                 CHUCK GRASSLEY, Iowa
    DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
    CHUCK SCHUMER, New York              JON KYL, Arizona
    DICK DURBIN, Illinois                JEFF SESSIONS, Alabama
    SHELDON WHITEHOUSE, Rhode Island     LINDSEY GRAHAM, South Carolina
    AMY KLOBUCHAR, Minnesota             JOHN CORNYN, Texas
    AL FRANKEN, Minnesota                MICHAEL S. LEE, Utah
    CHRISTOPHER A. COONS, Delaware       TOM COBURN, Oklahoma
    RICHARD BLUMENTHAL, Connecticut
                Bruce A. Cohen, Chief Counsel and Staff Director
            Kolan Davis, Republican Chief Counsel and Staff Director
                                     ------

       Subcommittee on Antitrust, Competition Policy and Consumer Rights

                         HERB KOHL, Wisconsin, Chairman
    CHUCK SCHUMER, New York              MICHAEL S. LEE, Utah
    AMY KLOBUCHAR, Minnesota             CHUCK GRASSLEY, Iowa
    AL FRANKEN, Minnesota                JOHN CORNYN, Texas
    RICHARD BLUMENTHAL, Connecticut
           Caroline Holland, Democratic Chief Counsel/Staff Director
                    David Barlow, Republican General Counsel

                                C O N T E N T S

                                  ----------

                        STATEMENTS OF COMMITTEE MEMBERS

                                                                       Page

    Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin......     1
    Leahy, Hon. Patrick, a U.S. Senator from the State of Vermont,
      prepared statement.............................................   151
    Lee, Hon. Michael, a U.S. Senator from the State of Utah.........     2

                                   WITNESSES

    Azoff, Irving, Executive Chairman and Chairman of the Board, Live
      Nation Entertainment, Inc., and Chairman and Chief Exective
      Officer, Front Line Management Group, Los Ageles, California...     8
    Bronfman, Edgar, Jr., Director, Warner Music Group Corp., New
      York, New York.................................................    10
    Faxon, Roger C., Chief Executive, EMI Group, New York, New York..     6
    Grainge, Lucian, CBE, Chairman and Chief Executive Officer,
      Universal Music Group, Santa Monica, California................     5
    Mills, Martin, Founder, Beggars Group, London, United Kingdom....    12
    Sohn, Gigi, President, Public Knowledge, Washington, DC., on
      behalf of Public knowledge and Consumer Federation of America..    13

                             QUESTIONS AND ANSWERS

    Responses of Lrving L. Azoff to questions submitted by Senators
      Kohl and Lee...................................................    39
    Responses of Edgar Bronfman, Jr. to questions submitted by
      Senators Klobuchar, Kohl and Lee...............................    45
    Responses of Roger C. Faxon to questions submitted by Senators
      Klobuchar, Kohl and Lee........................................    59
    Responses of Lucian Grainge to questions submitted by Senators
      Klobuchar, Kohl and Lee........................................    65
    Responses of Martin Mills to questions submitted by Senators Kohl
      and Lee........................................................    79
    Responses of Gigi Sohn to questions submitted by Senators Kohl
      and Lee........................................................    84

                           SUBMISSIONS FOR THE RECORD

    American Antitrust Institute (AAI), Hunt Valley, Maryland,
      statement......................................................    90
    Azoff, Irving, Executive Chairman and Chairman of the Board, Live
      Nation Entertainment, Inc., and Chairman and Chief Exective
      Officer, Front Line Management Group, Los Ageles, California,
      statement......................................................   104
    Bronfman, Edgar, Jr., Director, Warner Music Group Corp., New
      York, New York, statement......................................   109
    Buchanah, Jay, Rival Sons, vocals; Scott Holiday, Rival Sons,
      guitar; Robin Everhart, Rival Sons, bass; Michael Miley, Rival
      Sons, drums, Los Angeles, California, June 14, 2012, joint
      letter.........................................................   123
    Cronin, Kevin, REO Speedwagon, June 15, 2012, letter.............   124
    Faxon, Roger C., Chief Executive, EMI Group, New York, New York..   125
    Forbes.com, Geoffrey Manne and Berin Szoka, joint statement......   134
    Grainge, Lucian, CBE, Chairman and Chief Executive Officer,
      Universal Music Group, Santa Monica, California................   137
    International Federation of Musicians (fim), Benoit Machuel,
      General Secretary, Paris, France, June 14, 2012, letter........   149
    Jones, Jeff, Apple, June 20, 2012 letter.........................   150
    Madden, Benji, Good Charlotte, and Joel Madden, Good Charlotte,
      June 11, 2012, joint letter....................................   152
    Mann, Chris, June 19, 2012, letter...............................   153
    Merlin, Charles Caldas, CEO, June 19, 2012, letter and attachment   154
    Mills, Martin, Founder, Beggars Group, London, United Kingdom,
      statement and supplemental statement...........................   158
    Rae, Casey, Deputy Director, Future of Music Coalition,
      Washington, DC, statement......................................   185
    Sohn, Gigi, President, Public Knowledge, Washington, DC., on
      behalf of Public knowledge and Consumer Federation of America,
      statement......................................................   190

      THE UNIVERSAL MUSIC GROUP/EMI MERGER AND THE FUTURE OF ONLINE MUSIC

                                  ----------

                            THURSDAY, JUNE 21, 2012

                               U.S. Senate,
         Subcommittee on Antitrust, Competition
                           Policy, and Consumer Rights,
                                    Committee on the Judiciary,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 2:18 p.m., in
    room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl,
    Chairman of the Subcommittee, presiding.
        Present: Senators Kohl, Klobuchar, Franken, Blumenthal, and
    Lee.

     OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE
                           STATE OF WISCONSIN

        Chairman Kohl. Good afternoon. Sorry to be a little late
    this afternoon. We had some votes to complete.
        In recent years, the music industry has undergone a radical
    transformation as consumers embrace new digital music
    technologies. The transformation is as revolutionary today as
    the Gramophone, radio, and recorded music were a century ago.
        The deal before us today is just one example of this
    transformation. EMI is being sold in two parts--to Universal
    and to Sony--so that there will only be three major record
    companies remaining. Today we meet to consider the sale of
    EMI's recorded music business to Universal and its impact on
    competition, artists, and consumers.
        As recently as 20 years ago, virtually all consumers
    obtained their music by going to their local record stores to
    buy records or CDs, often after hearing the music on the radio.
    Today the market is very different. About half of all music
    revenue comes from digital sales over the Internet, from
    downloading songs and albums via iTunes, or listening to an
    online music subscription service such as Spotify, to give only
    two examples.
        Recording artists can reach consumers directly over the
    Internet without ever signing a deal with a record company.
    Most record stores have closed as a result of the new online
    services. For those consumers who still buy physical CDs, they
    do so primarily at large chains such as WalMart or Target or by
    ordering over the Internet on a website like Amazon. And the
    music industry faces ongoing challenges from illegal
    downloading of music over the Internet.
        In this brave, new world for the music industry, Universal
    and EMI argue that this deal should not concern us. They
    contend that the market shares resulting from the merger should
    not concern us and that the power to set prices is in the hands
    of online distributors or the large chain retailers with whom
    they must deal. And the ongoing problem of piracy, they argue,
    effectively constrains their ability to raise prices when
    consumers can easily get music for free via illegal downloads.
        Nonetheless, we need to closely examine whether reducing
    the number of major record companies to three and giving
    Universal as much as 40 percent of the music business by some
    measures will adversely affect competition. Concerns are
    especially strong with respect to the market for online
    distribution. Will Universal's music catalogue be so large as
    to make it a gatekeeper that can make or break any new online
    service and allow it to prevent new competitively priced
    services from launching?
        We must carefully scrutinize what this merger will mean for
    consumers who buy music on physical CDs, still half of all
    music sales revenue. In almost all industries, reducing the
    number of competitors from four to three expands the market
    power of the remaining companies and increases the risk of
    higher prices. Why shouldn't these same principles apply to the
    music business? Moreover, will the three remaining record
    companies be able to obtain the lion's share of floor space and
    promotions in retail stores, thereby crowding out the smaller
    competitors?
        We must be mindful of the possible harmful effects on
    independent labels and artists. As in so many creative
    industries, innovation and new forms of music often come from
    those artists not signed to major record companies. We need to
    be careful to ensure that this consolidation does not impede
    the ability of independent record labels to compete or place
    undue barriers to the emergence of new, innovative, and diverse
    talent in the music industry.
        So our examination of this transaction leaves us with more
    questions than answers as we begin today's hearing. While we
    recognize that the music industry has gone through enormous
    changes and challenges in recent years, nevertheless we are
    mindful of the basic principles of antitrust and the need to
    maintain competition in this industry for both consumers and
    artists.
        We look forward to the testimony of our panel of witnesses
    on these issues, and we are very pleased to be with you today.
        Senator Lee, any comments?

     STATEMENT OF HON. MIKE LEE, A U.S. SENATOR FROM THE STATE OF
                                  UTAH

        Senator Lee. Yes, thank you, Mr. Chairman. Thanks to all of
    you for joining us today.
        The recorded music industry is both a staple of our popular
    culture and an essential element for our economy. The 40,000
    businesses involved in the United States music industry employ
    over 100,000 people, including artists, managers, technicians,
    and record label staff. And music can be big business.
    Estimated revenues for the sale of recorded music in America
    now exceed $7 billion each year.
        The music industry is also changing rapidly. Last year,
    digital sales surpassed physical sales for the first time in
    history. Online retail and digital distribution services
    provide customers with unprecedented access to lesser known
    artists who might otherwise have been unable to obtain a
    recording contract. Digitization has opened the door to a new
    and diverse world of innovative platforms and modes of
    competition.
        But the rise of digital music has also made illegal pirated
    recordings readily accessible to anyone with a computer who has
    an Internet connection. The future of online music is bright
    but uncertain. Although Internet-based radio and other music
    services are growing at an impressive pace, some suggest that
    the Copyright Royalty Board's rate-setting process is broken
    and should be reformed. Whatever the nature of any such
    reforms, enforcement of our antitrust laws must be oriented to
    help foster innovative technologies and enhance consumer
    welfare.
        As the music industry attempts to traverse a changing
    technological and competitive landscape, some consolidation
    may, of course, be expected. It, therefore, came as little
    surprise when Universal Music Group announced its intention to
    acquire EMI's record label. This announcement followed the 2007
    transfer of EMI, which has suffered from sharply declining
    market share and enormous debt, to a private equity firm and
    eventually to Citigroup.
        Many industry observers welcome the prospect of Universal
    taking full advantage of EMI's artists and catalogue, helping
    to revise an industry in the midst of some decline. Universal's
    productive use of EMI's assets promises efficiencies that an
    equity firm or a bank is unlikely to achieve.
        At the same time, some competitors and public interest
    groups note that a Universal/EMI merger would reduce the number
    of major labels from four to three and give Universal a larger
    market share than either of the remaining majors.
        Critics fear that a combined Universal/EMI could leverage
    its market power to increase prices to retailers and to
    consumers. Some worry that the combined company may stifle
    innovation in emerging digital distribution models by refusing
    to license its catalogue to inventive services.
        Others also fear that a dominant label might seek to
    exclude competitors from accessing key promotional space in
    retail and digital distribution services.
        These concerns underscore the complex, evolving nature of
    the music industry and the need for careful analysis of the
    relevant markets and the manner in which market power might be
    exercised. I am hopeful that this hearing will provide insight
    into the competitive landscape of the recorded music industry.
        Mergers play an essential role in our economy and should be
    permitted where they do not harm consumers. Mergers can bring
    to bear superior managerial skills, allow for more productive
    use of underutilized assets, and result in economies of scale,
    reduced costs, improved quality, and increased output.
        The potential for mergers generally provides positive
    incentives for industry managers who recognize a need to
    maximize profits or face consolidation. Likewise, innovators
    know there is an acquisition market for the businesses that
    they create.
        Under most definitions of the relevant markets, this merger
    will result in a significant degree of concentration. As the
    merger guidelines make clear, however, this is not the end of
    the analysis, and the merger may proceed where other
    competitive factors counteract the potentially harmful effects
    of increased concentration.
        Universal and other proponents of the merger assert that
    there is reason to believe such competitive factors are present
    in the various markets for recorded music. Music retailers
    wield tremendous market power, with Apple and WalMart alone
    accounting for up to 60 percent of sales. This countervailing
    market power may well protect against labels' successfully
    raising marginal prices.
        The nature of the modern music industry may provide an
    additional protection against anticompetitive effects. The
    prevalence and affordability of technology has increased the
    ease and entry quite substantially, resulting in greater access
    and an increased variety of access points, whether YouTube,
    MySpace, or iTunes, for artists and for independent labels. In
    fact, independent labels now account for approximately 30
    percent of music ownership.
        Finally, at least at present, we cannot ignore the effect
    of pirated music. The threat and the prevalence of piracy
    surely impact decisionmaking throughout the legitimate recorded
    music industry and, therefore, must be considered as part of
    any comprehensive antitrust analysis.
        Government regulators should be wary of intervening in
    rapidly changing and innovative markets. The music industry has
    experienced much turmoil as it struggled to adjust to changes
    in technology, pricing models, and consumer expectations. Gone
    are the days when consumers bought entire albums in order to
    acquire just a single song. Also gone are the days when
    consumers purchased the same album a second time simply to
    update their libraries to the latest format. Today record
    labels and the artists they represent have their work stolen
    and shared freely over the Internet. Every year consumers
    demand more music for less money. As the music industry
    grapples with these and other challenges, Government regulators
    ought to be careful not to prohibit reasonable business
    judgments and decisions that may lead to efficiencies and
    productive solutions.
        I look forward to hearing the testimony today, and I thank
    the witnesses for coming.
        Chairman Kohl. Thank you, Senator Lee.
        Now I would like to introduce our panel of witnesses. First
    to testify will be Lucian Grainge, who is chairman and CEO of
    Universal Music Group since 2011.
        Next we will be hearing from Roger Faxon, who serves as the
    CEO of EMI Group and first joined that company in 1994.
        Our third witness will be Irving Azoff, executive chairman
    and chairman of the board of Live Nation Entertainment, and
    chairman and CEO of Front Line Management Group.
        Next we will be hearing from Edgar Bronfman, Jr., director
    and former chairman of Warner Music Group and former executive
    vice chairman of Vivendi/Universal.
        Next we will be hearing from Martin Mills, founder and
    chairman of Beggars Group, who has served as vice chairman of
    the Association of Independent Music.
        Finally, we will be hearing from Gigi Sohn, president and
    CEO of Public Knowledge and a member of the Advisory Board of
    the Future of Music Coalition.
        We thank you all for appearing at our Subcommittee hearing
    today. I ask all of you now to rise and raise your right hand
    as I administer the oath. Do you affirm that the testimony you
    are about to give before this Committee will be the truth, the
    whole truth, and nothing but the truth, so help you God?
        Mr. Grainge. I do.
        Mr. Faxon. I do.
        Mr. Azoff. I do.
        Mr. Bronfman. I do.
        Mr. Mills. I do.
        Ms. Sohn. I do.
        Chairman Kohl. Thank you very much.
        We will start now with you, Mr. Grainge, and we are looking
    forward to your statement. We request that your statement be
    limited to 5 minutes. Mr. Grainge.

    STATEMENT OF LUCIAN GRAINGE, CBE, CHAIRMAN AND CHIEF EXECUTIVE
        OFFICER, UNIVERSAL MUSIC GROUP, SANTA MONICA, CALIFORNIA

        Mr. Grainge. Thank you. Good afternoon, Chairman Kohl,
    Ranking Member Lee, and members of the Subcommittee. My name is
    Lucian Grainge, and I am the chairman and chief executive of
    Universal Music Group. It is an honor for me to be here today,
    and I welcome the opportunity to discuss both the issues
    affecting the music industry at large together with our
    proposed acquisition of EMI's recorded music business.
        I count myself lucky to have spent my entire professional
    life in and around music. Music connects us, and it inspires
    us. I started in the music industry 33 years ago as a talent
    scout. I was a talent scout then, and I am a talent scout now.
        As well as continuing to identify great artists, I also
    scout for writers, producers, creative executives, startups,
    entrepreneurs, and digital platforms.
        The music business is reinventing itself on a daily basis,
    and this reinvention has not always been kind to us. The
    industry is half the size it was in 2001, and I am sure that
    Roger, Edgar, Irving, and Martin will agree that we have all
    managed our business through a very difficult decade. So it is
    invigorating to talk about the future this afternoon, to talk
    about the potential for growth, the commitment to digital
    expansion, and a fresh, positive energy.
        The mere concept that we can discuss growth is not
    something we have been able to do for a long time. I believe
    that Universal's proposed acquisition of EMI sits at the heart
    of this positive move forward. Roger Faxon has done a
    remarkable job with EMI under challenging circumstances, and
    the company is now on a sounder footing. We propose to make a
    courageous investment in EMI to sign artists, develop them, and
    invest in future technologies and distribution models.
        Digital is our future, and we are wholeheartedly committed
    to supporting every viable legal venture that gives consumers
    what they want, when they want it, and on the devices that they
    want.
        Today fans learn about music on blogs and social networks
    and listen to it on many services, including, for example,
    Cricket's Muve, Rdio, and Spotify.
        Retailers have the ability to find out what consumers want
    as a result of this new technology. We cannot control
    consumers' access to music or artists' access to consumers.
    Technology has empowered artists and consumers, and I am proud
    that Universal has well over 100 digital music partnerships in
    the United States alone.
        The proposed acquisition comes at a time when all the
    competition in this industry is as fierce as I have ever known
    it. All labels of whatever size see opportunities that simply
    would not have existed even months ago. This competition is a
    good thing, and it requires that we make the right strategic
    moves in order to protect and promote our talent base.
        Let me give you an example of how the landscape has
    changed. Ten years ago, independent labels were 23 percent of
    the market. Today they have grown to 30 percent. Digital has
    lowered the barriers to entry. Technology and the Internet have
    enabled anyone to create music, market music, and distribute
    music.
        Reinvigorating EMI with Universal's resources and
    innovation is not only good for our company but good for
    artists, consumers, and everyone who is connected with music.
        As the artists create the market, Universal is also
    delighted to have the support of the unions SAG-AFTRA and AFM,
    both of whom represent America's recording artists and
    professional musicians. Universal will always have one very
    clear focus: to promote music in as many ways as possible.
        So thank you for allowing me to explain why I am so excited
    about the future of this industry, and I look forward to a
    productive discussion with all of you.
        [The prepared statement of Mr. Grainge appears as a
    submission for the record.]
        Chairman Kohl. Thank you, Mr. Grainge.
        Mr. Faxon.

     STATEMENT OF ROGER C. FAXON, CHIEF EXECUTIVE, EMI GROUP, NEW
                             YORK, NEW YORK

        Mr. Faxon. Thank you, Mr. Chairman, Ranking Member Lee,
    members of the Subcommittee. I am Roger Faxon, and as the
    Chairman has said, I am chief executive of the EMI Group, and I
    am pleased to join you today to discuss the Universal Music
    Group's proposed acquisition of our recorded music division.
        To appreciate the competitive implications of this
    transaction, I think it is important to place it in the context
    of the market for recorded music as it is today, and not as it
    may have been in the past. Without a doubt, the music landscape
    has changed beyond all recognition from where it was even 10
    years ago.
        In that time, overall industry revenues have more than
    halved, even as digital revenues have soared. The forces that
    have produced this decline have substantially shifted the
    impact of record company consolidation, on both consumers and
    the wider music business. I would like to take you through why
    I believe that to be so.
        As digital exploded, the CD fell through the floor.
    Specialist retailers, which were the backbone of our industry,
    all but became extinct. For the vast majority of the thinning
    ranks of retailers that remain, music is not at the center of
    their offering. But they are central to record companies and
    the careers of their artists. So, inevitably, it is they, not
    the labels, that are in control. It is the retailers who decide
    which albums they stock and what commercial terms they will
    take.
        Retail concentration is even more pronounced on digital
    platforms. Between the iTunes and Amazon services, you have two
    players accounting for 90 percent of the download business and
    over 80 percent of all digital revenues. In this environment,
    pricing again does not sit with the gift of the record
    companies, regardless of size or market position.
        Digital distribution has created a music meritocracy. There
    is no limit to the amount of music that can be stocked. That
    means any band, budding or established, can have their music
    distributed on digital platforms. Major record companies, if
    they ever were, are no longer the gatekeepers.
        In this meritocracy, good music rises to the top. The skill
    is in finding that music and helping to connect it with an
    audience, and that skill is not confined to one company or
    group of companies.
        The Internet has also democratized music promotion. The
    explosion in media has taken promotional power away from the
    editors and radio program directors and put it firmly in the
    hands of music fans through Facebook, Twitter, YouTube, and a
    myriad of other sites and services--all essential to an
    artist's ultimate success. These fans do not care about market
    position of an artist's record company. They care about the
    music and whether it is any good. And radio stations are
    focused on playing only the music that their extensive callout
    research tells them will connect with the highest possible
    audience, irrespective of its source. Again, it is the music
    that matters, not the source.
        Technology has significantly reduced the cost of entry for
    new music companies. As a result, the market is more crowded
    and competitive than it has been in my experience. So record
    companies cannot control consumer pricing, do not control
    access to consumers, cannot exert control over promotional
    platforms or music discovery tools that fans use, and they have
    to compete with the vastly increased number of alternative
    paths to market for artists. If there ever were antitrust
    issues implicated with label consolidation, it seems to me they
    are not present today.
        As a result of all this change, the focus of the music
    industry has returned to where it should be--on helping artists
    develop the most compelling music and working with them to
    ignite passion for it in their fans. And I think we are doing a
    very good job of that.
        But we also have to assure that the creators of that music
    are properly rewarded for their contribution. And there we are
    not doing as well as we should. The ambiguity and
    unenforceability of our intellectual property laws is failing
    our creators. Individual rights holders are no longer able to
    protect their music, ISPs are not held responsible for their
    actions, and safe harbor provisions designed to encourage
    innovation are instead being used as a shield by bad actors
    seeking to build their own business without compensating the
    creators whose music underpins those new businesses.
        Technological and musical innovation are not mutually
    exclusive. Content created by great artists and songwriters can
    drive consumers toward new ventures, and exciting new platforms
    and products can open up a wider market for the works of
    creators. But our institutions have allowed the balance to
    shift too far in favor of big technology. The impact on our
    creative community has been devastating and will only worsen if
    the scales continue to tip unchecked.
        Music touches us in a way that nothing else can. For me it
    has been an absolute privilege to be able to represent some of
    the greatest artists this world has ever seen. Yet without a
    solid framework of intellectual property rights to underpin
    that creativity, we do not just threaten labels or jobs, but
    America's ability to nurture the next Jay-Z, the next Beach
    Boys, the next Norah Jones. That will not be the fault of any
    merger or acquisition. It will be the fault of our own
    unwillingness to stand up to protect one of the greatest
    cultural strengths this country has to offer.
        Thank you.
        [The prepared statement of Mr. Faxon appears as a
    submission for the record.]
        Chairman Kohl. Thank you, Mr. Faxon.
        Mr. Azoff.

     STATEMENT OF IRVING AZOFF, EXECUTIVE CHAIRMAN AND CHAIRMAN OF
     THE BOARD, LIVE NATION ENTERTAINMENT, INC., AND CHAIRMAN AND
       CHIEF EXECUTIVE OFFICER, FRONT LINE MANAGEMENT GROUP, LOS
                          ANGELES, CALIFORNIA

        Mr. Azoff. Thank you, Mr. Chairman, and thanks to the
    Committee for having me here today.
        I grew up in Danville, Illinois, a mid-American town with
    all-American ideals, and briefly attended the University of
    Illinois. For more than 43 years in the music business, I have
    focused on one thing: serving artists. The music industry I
    joined was a vibrant, emerging, and entrepreneurial business
    whose format of choice was vinyl. Throughout all the choices--
    vinyl, 8-track, cassette, and compact disc--one thing remained
    constant: the power of the record label. The emergence of the
    Internet has changed that.
        I work with acts big and small, some that are household
    names and some who should be but just have not yet gotten there
    yet. Let me be very clear. None of them have to sign to a major
    label anymore. Majors cannot sign every act, and the door is
    open for many others to do so.
        In fact, independent labels are capturing more and more
    market share every year. Bon Iver won the Grammy for Best New
    Artist this year. Esperanza Spaulding won last year. And Mr.
    Mills' XL has brought us the biggest selling artist of 2011 in
    Adele.
        Approximately 40 percent of our artists are not even on
    labels. I have no doubt that labels add value, but you just do
    not have to have one in a world where artists can deliver an
    album direct to fans themselves. It is a little like hiring an
    interior decorator to redo your house. The experience and
    results can be great, but some acts enjoy and prefer to do it
    on their own and put their own imprint on things. With services
    like iTunes, CD Baby, Top Spin, Reverb Nation, Pro Tools,
    Facebook, Spotify--you name it--artists can do everything
    themselves on their own very professionally.
        It used to be that bands could not make a professional
    album without the backing of a label. Labels used to be THE
    gatekeepers to fans. But today those barriers have been blown
    away. The new gatekeepers are the fans. Facebook and other
    social media make fans the essential promotional power. If a
    fan ``likes'' a song and tells a friend or two or 10,000, an
    artist is on their way. The power today rests with consumers,
    not record labels. So while the Internet has brought challenges
    for many, it has also given bands opportunities, access, and
    control previously unknown to any generation of artists.
        The reason a combined UMG/EMI is a good thing rests in the
    much bigger picture. Our industry has been turned on its head
    in the last decade. With all the great developments the
    Internet has brought us, the economics are still daunting.
        Most musicians make a living today from touring, not record
    sales as they once did. And it makes sense, since consumers are
    not buying $15 CDs anymore, they are paying for a single track
    download from Amazon or iTunes or listening to ad-supported
    services that result in mere fractions of a penny-per-play
    being paid to the artist; or worse, still, they just go to a
    torrent site and get it for free. Late to embrace the Internet,
    labels are playing catch-up. But any way you slice it, recorded
    music sales are still the core of a label's business model.
        Those who speculate about the demise of competition simply
    do not live in the hyper-competitive music world that I see
    every day. Competition is fierce between the major labels and
    fierce between the majors and indies. Competition is fierce as
    mobile services vie against one another and against Apple.
        As for the brouhaha around this deal, Mr. Bronfman has been
    talking about combining Warner and EMI for the better part of a
    decade. The entire industry expected it to happen, Wall Street
    expected it to happen, journalists expected it to happen.
    Warner had a chance to outbid Universal in this process but
    chose not to. Now they regret their decision and are spending
    millions to fight this deal. Well, I do not think the
    Government should step in to give them another bite at the
    apple. That is not how our free economy works.
        The fact is it would have been great if EMI could have made
    a go of it on its own. But the recession, piracy, and the facts
    surrounding Terra Firma and Citi combined to make that a pipe
    dream. The aura of uncertainty made EMI a risky place for an
    artist to sign. This business is about relationships and
    confidence that the team you sign with will be right beside you
    through the entire journey.
        Uncertainty made it hard for EMI to compete. With Universal
    taking over and their commitment to resurrecting Capitol
    Records, there will actually be another record company for
    artists to explore if they want to. As I see it, it is not one
    less company--it is one more choice.
        Bottom line, the people concerned that a combined UMG/EMI
    would have too much power really just do not get what has
    happened to the business over the last decade. Labels do not
    control artists. Those days are gone. And no label in the world
    can control the supremacy of the modern music fan. The power
    shift has already taken place, and no one should worry for a
    minute that it rests with the labels any longer.
        Thank you.
        [The prepared statement of Mr. Azoff appears as a
    submission for the record.]
        Chairman Kohl. Thank you, Mr. Azoff.
        Mr. Bronfman.

    STATEMENT OF EDGAR BRONFMAN, JR., DIRECTOR, WARNER MUSIC GROUP
                       CORP., NEW YORK, NEW YORK

        Mr. Bronfman. Good afternoon, Chairman Kohl, Ranking Member
    Lee, and members of the Subcommittee. I am Edgar Bronfman, Jr.
    I thank you for the opportunity to discuss why Universal's
    proposed takeover of EMI would do pervasive and permanent
    damage to digital innovation, to the music industry, and to the
    American consumer.
        This merger would mean a world where one dominant company--
    Universal/EMI--sets the prices, terms and conditions for future
    digital evolution. Where that company would stand as gatekeeper
    between consumers and choice, and where digital innovation, one
    of the main engines of economic growth in this country, would
    be stifled solely for the benefit of one already large company
    that wants to become one dominant giant.
        The Universal/EMI merger would reduce the number of music
    majors from four to three, one of which would be a super major,
    almost as large as the other two majors combined. Universal/EMI
    would control more than 50 percent of the Billboard Hot 100
    titles and 42 percent of U.S. recorded music revenue. It is
    worth noting that a combined AT&T/T-Mobile would have
    controlled 43 percent of U.S. wireless revenue.
        Universal/EMI's 42-percent share would be extreme by almost
    any standard. The media industry has never seen this level of
    concentration. Last year, the largest movie studio, Paramount,
    had about 20-percent market share, Random House was under 20
    percent, and Comcast, the largest cable operator, had just over
    20 percent of pay television.
        Universal has tried to portray its market share as lower
    than it actually is by excluding labels that it distributes,
    but that is disingenuous. Owned and distributed market share is
    the metric Universal uses when talking to potential purchasers
    of its parent Vivendi's shares. That is the metric it uses when
    it is seeking better economics from the Copyright Royalty
    Board. And, most important, that is the metric it uses when
    negotiating the terms of its digital deals.
        When it comes to market power, especially in digital, where
    contracts include all music under distribution, there is no
    distinction between music that is distributed and music that is
    owned. Market share alone should make this merger suspect. But
    its profound ripple effects on digital innovation make it
    untenable because of music's unique role in the vibrant
    intersection between media and technology.
        A decade ago, the Internet was assumed to be the music
    industry's downfall, but we worked to reinvent ourselves, and
    last year U.S. music shipments increased for the first time
    since 2004. Digital downloads now account for over 50 percent
    of U.S. recorded music sales, overtaking physical sales for the
    first time. Even proponents of the merger acknowledge this
    inflection point in the U.S. The real winners are consumers,
    who now enjoy music in more ways than ever before. More
    consumers pay for music than for any other form of digital
    content, and we are still in the early stages of music's
    digital transformation, with thousands of innovators dreaming
    up new opportunities. However, this proposed merger would
    dramatically impede, even derail, this transformation.
        To understand the risk, let me share a story to illustrate
    how innovation comes to market. It is about an entrepreneur
    from a technology company who came to pitch Warner on a truly
    disruptive idea in 2002--a digital music ``startup.'' His
    company was a great innovator but had not seen significant
    growth in years. Yet this person believed he could reshape the
    way consumers experience music.
        That entrepreneur was Steve Jobs. The company was Apple.
    The startup was iTunes.
        Although Warner had only 17-percent U.S. market share, it
    was the first major to sign a deal with Apple. With that, Apple
    had the foundation it needed. It shopped the Warner deal around
    to the other majors and eventually got them all onboard. And
    the rest is history. iTunes has defined Apple's content
    strategy, a key to its becoming the world's most valuable
    company.
        The iTunes story shows how important the current
    competitive balance among record labels is to enabling digital
    innovation. The sequential negotiation technique that Apple
    used in 2002 is used today by every digital startup. This
    process is critical for disruptive digital services that
    threaten the status quo. Entrepreneurs can reach terms with any
    of the four majors and build momentum from there.
        Though even at its current large size some of Universal's
    actions are dampening digital innovation, as the Wall Street
    Journal reported Wednesday, the market generally works today.
    However, this proposed merger would obliterate the fragile
    competitive dynamic that currently exists. With its 42-percent
    market share, Universal/EMI would unilaterally determine which
    services would live or die. It would be able to coerce ever
    more onerous terms, taxing entrepreneurs, jeopardizing
    innovation, constricting choice, and raising prices for the
    American consumer.
        In sum, consumers are well served when no one company can
    dominate all decisionmaking for the market. Permitting this
    merger would grant Universal/EMI the power to serve as the sole
    arbiter of digital innovation. A broad group ranging from
    consumers to artists to digital startups, innovators and record
    companies alike have all expressed opposition to this merger so
    that a diverse and vibrant future can exist for music fans
    everywhere. We believe Universal's attempt to buy its way to a
    position of unilateral dominance is inconsistent with such a
    future. We hope this Subcommittee will agree, and we urge you
    to do what you can to prevent this merger from being
    consummated.
        Thank you.
        [The prepared statement of Mr. Bronfman appears as a
    submission for the record.]
        Chairman Kohl. Thank you, Mr. Bronfman.
        Mr. Mills.

      STATEMENT OF MARTIN MILLS, FOUNDER, BEGGARS GROUP, LONDON,
                             UNITED KINGDOM

        Mr. Mills. I am honored to be here. Thank you.
        Please forgive me if I use some strong words today, but
    having read the statements of those on the monopolists' bench,
    I believe they are needed. I speak not just for myself but also
    for thousands of independent labels and artists worldwide.
        Seven letters: C-O-N-T-R-O-L. It spells ``control.'' That
    is what this is about.
        Do not believe them when they say the music market is now a
    Garden of Eden in which any young artist can become famous
    overnight without a label. That is simply not true. Ask them
    who these fortunate artists are.
        Mr. Azoff says that 40 percent of his artists manage
    without a label. When I Google his company, I find the Eagles,
    Christine Aguilera, Kings of Leon, John Mayer, Van Halen,
    Jennifer Hudson, Miley Cyrus, Kenny Chesney, Kid Rock, Avril
    Lavigne, Aerosmith, and Jimmy Buffett--all on the front page. I
    do not recall any of them becoming successful without a record
    label. Do you? And all of them, I believe, released their last
    albums in association with a major. Whereas established stars
    may plow their own furrow these days, often with the benefit of
    services from a major label, any new artist needs a label just
    as much as Steven Tyler did. Even our artist Adele needed
    Sony's strength in the U.S.A.
        Do not believe them when they say market share is not
    market power. Market power is why they are doing this--the
    power to dominate digital services and impose their demands
    upon them, the power to leverage a disproportionately onerous
    deal, the power to squeeze out the competition, the power to
    impose what Universal wants on the consumer. You will see how
    they do that in the written evidence. It is all true.
        Do not believe them when they say the independents
    represent a countervailing competitive force, the thousands of
    tiny, fragmented indies. Do not believe the 30-percent of the
    market figure for indies in this context. Two-thirds of that
    has digital rights controlled by the majors.
        Do not think that the resulting Universal/EMI 40-percent
    market share figure is as simple as it looks. Universal/EMI's
    share of hit Billboard's Top 100 for the last year was nearly
    70 percent when you include controlled shares and negative
    rights to block its repertoire. Indeed, looking at just last
    week's Billboard's charts, eight of the top ten singles will be
    post-EMI controlled by Universal. That is 80 percent.
        When you hear Universal downplay its market share today,
    you should ask yourselves what market share do they insist on
    in their commercial negotiations, for splitting anti-piracy
    proceeds, for advances for music services. Very different. This
    is about Universal leveraging new acts who are already
    successful acts and obtaining more than their fair share of the
    oxygen of exposure. Even today, contrary to what Mr. Faxon
    says, major labels have 92 percent of radio play.
        Most great music, the music that changes tastes and lives,
    starts outside the mainstream, and that means on independent
    labels. Elvis Presley, Muddy Waters, R.E.M., Adele--they all
    did that. In fact, the economics of the majors these days means
    that signing artists without mass market potential makes no
    sense for them. If this transaction goes through, the next
    great artist may never be found.
        With the kind of increased market dominance that Universal
    seeks here, it will completely control the shape of all new
    digital services. No one will be able to deny them. Look at
    their ability to raise prices of iTunes' new music. Look at the
    Nokia ``Comes with Music'' service disaster and Universal's
    hand in that. Look at the terms they were able to impose even
    on Google. It is all in the testimony.
        Jean-Bernard Levy, the CEO of Vivendi, Universal's parent,
    is reported to have said that the aim is to boost Universal's
    bargaining power with mass market stores and a new breed of
    online distributor. Boost their power. Exactly.
        Modern society sees unlawful monopolies as being bad, with
    good and with obvious reason. Some are worse than others. If
    airlines merge or soft drinks companies, is the effect on
    consumer choice that bad? Isn't one seat or one soft drink
    pretty much the same as another? But that is certainly not the
    case with music. Music matters to people. It affects. It
    changes lives. It is human. It is personal. You cannot
    substitute a Katy Perry for a Lady Gaga for an Adele.
        Yet in the world Universal seeks, great music will suffer,
    and we will be headed for a lowest common denominator music
    market with consumers having less choice and probably paying
    more.
        Universal is a great company. Do not get me wrong. It has
    got great people. But there is big and there is too big. Give
    them the position of increased power and greater dominance that
    they seek, and they will exploit it. And specifically for a new
    company to start and grow in this environment, as mine did,
    will quite simply be impossible.
        Please forgive my passion today, but not only do I
    absolutely believe what I say, I know it to be true.
        Finally, Mr. Chairman, I must apologize. I have to leave at
    3:30, which is the anticipated end time, but I welcome any
    questions before that point.
        Thank you.
        [The prepared statement of Mr. Mills appears as a
    submission for the record.]
        Chairman Kohl. Thank you, Mr. Mills.
        Ms. Sohn.

         STATEMENT OF GIGI SOHN, PRESIDENT, PUBLIC KNOWLEDGE,
     WASHINGTON, D.C., ON BEHALF OF PUBLIC KNOWLEDGE AND CONSUMER
                         FEDERATION OF AMERICA

        Ms. Sohn. Chairman Kohl, Ranking Member Lee, members of the
    Subcommittee, thank you for the opportunity to discuss the
    significant consumer harms the Universal Music Group and EMI
    Music merger would cause if allowed. I am speaking today on
    behalf of Public Knowledge and the Consumer Federation of
    America.
        Online music and digital platforms they ride on hold
    tremendous promise for consumers and artists. Gone are the days
    when music fans could only listen to the latest album if they
    traveled to a physical record store, bought the album, and
    brought it back home to play on a stereo system. Technology now
    allows consumers to buy music at the click of a button and
    listen to that music on any number of personal devices. Artists
    also have been more empowered and capable to retain their
    independence by utilizing digital distribution platforms rather
    than going to a label.
        Now, imagine that it is last year, 2011, a great year, and
    you are in the business of starting a digital music service in
    the United States. This chart represents the Billboard Hot 100
    songs for 2011 as measured by sales and streaming activity. If
    you wanted to attract the consumers who are the most active
    music listeners, these 100 songs would have been the essential
    package. Without them, any avid music fan would see your
    service as incomplete, and you would not be able to attract the
    critical mass of subscribers necessary to make a profit. By the
    way, every single one of these artists is signed with one of
    the four major music labels.
        Now, imagine a world where UMG and EMI had already merged,
    and they decided that they would withhold their songs from your
    digital music service. If that was the case, then this is what
    your digital music service library would look like. The
    playlist suddenly looks very sparse. After all, you would not
    have six of the top ten songs for 2011. You would not even have
    a majority of the top 100 songs. A combined UMG and EMI would
    own 51 of them. The fact is you just would not have a viable
    digital music service, and as a result, you would be beholden
    to the merged entity. That is the harm this merger presents to
    consumers.
        Despite all of the improvements in technology and reduced
    costs of distribution, the music business is not immune to the
    exertion of market power. As more consumers demand their music
    through the Internet, this merged entity--a super label, so to
    speak--has the inherent incentive and ability to maintain
    dominance by exerting its market power over this nascent
    business. That is why we believe this merger should be blocked.
    If it is not, you will see less competition and choice in
    distribution, stifled innovation, and higher prices. Already
    the music industry has gone through breathtaking consolidation
    as six major record labels have become four. Already innovative
    online music companies are challenged to enter the U.S. market.
    For example, the online streaming service Deezer, which is
    similar to Spotify, it has enjoyed success in 200 territories
    around the world, but it has not been able to enter the U.S.
    market because of licensing.
        EMI Music has gone against this trend. They were the first
    label to sell a digital download. They were the first label to
    remove digital rights management from their MP3s and iTunes,
    allowing consumers to listen to their music on any device. And
    they are the only label that actively works as a liaison
    between application developers and artists through their Open
    EMI Project.
        If this merger is allowed, consumers and artists will be
    the losers. Removing a maverick competitor like EMI from the
    market will ensure that the remaining three players obtain more
    control over the future of online music. I ask that the members
    of the Subcommittee take a hard look at this merger and its
    impact on consumers and artists.
        Thank you.
        [The prepared statement of Ms. Sohn appears as a submission
    for the record.]
        Chairman Kohl. Thank you, Ms. Sohn.
        Mr. Grainge, Universal has argued--your company--that we
    should not worry about its purchase of EMI even though this
    will result in only three major record companies that will
    remain because the record companies have little power over
    price. You contend that pricing power is in the hands of online
    companies like Apple iTunes or large chains like WalMart and
    that you cannot raise prices because you compete with free
    pirated music. You also argue that EMI is not competitively
    significant because it has few top artists under contract.
        So then please explain to us, why did Universal pay $1.9
    billion for EMI?
        Mr. Grainge. Senator, this is an incredibly changing
    landscape. The competition within the industry is really quite
    extreme and vibrant, and we are absolutely committed to giving
    our music--giving the artists as many opportunities to get
    their music to as many consumers and fans as we can.
        I must say that from my experience and where I sit, we
    would be insane not to license, develop, make our music
    available through as many platforms, through as many retailers
    as possible. Through technology, the consumer is voting and is
    telling all of us what they want, and we have to make it
    available.
        Chairman Kohl. Mr. Bronfman, why do you think Universal
    wants to buy EMI?
        Mr. Bronfman. Well, I think the three words from the movie
    ``All the President's Men'' is useful: ``Follow the money.''
    Universal is spending not only $1.9 billion to buy EMI, but it
    is taking even further risk because it has agreed to pay that
    purchase price, or essentially all of it, whether or not it
    achieves regulatory approval. If it does not achieve regulatory
    approval, the business goes back to Citi, Citi has to sell it
    in a distressed sale to someone else and remit whatever price
    they get to Universal. So Universal, if it does not buy EMI, is
    at risk for hundreds of millions of dollars. So, clearly,
    Universal wants it very, very badly. And the real reason is
    that it buys them a market-dominant position.
        It is very interesting to listen to the three witnesses to
    my right talk about how the Internet has changed the industry,
    and it has. But no one should be fooled that access equals
    revenue. Access does not equal revenue. Ninety-two percent of
    all radio airplay in the United States is controlled by major
    music labels. Of all the songs on iTunes, 94 percent of those
    songs have been downloaded 100 times or less in the past year.
        This is an industry that does not operate on the 80/20
    rule. It is an industry that operates on the 5/95 rule. Five
    percent of our products represent 95 percent of our revenue. So
    access is one thing, revenue is another, and controlling that 5
    percent is very, very valuable indeed. And that is why they are
    paying the price they are.
        Chairman Kohl. Mr. Bronfman, we understand that Warner
    Music attempted to purchase EMI. Is your opposition to the
    merger motivated by Warner's commercial interest or the
    interests of consumers? Isn't it true that your opposition to
    this deal is that it does not benefit Warner?
        Mr. Bronfman. Well, I certainly do not sit here and portray
    myself as a saint, Senator. What I would say, though, is that
    Warner's interests here are, frankly, not much more relevant
    than Sprint's interests were in the AT&T/T-Mobile merger. The
    fact of the matter is that this merger creates a market-
    dominant position--a market-dominant position that could not
    have been achieved by Warner had Warner acquired EMI. And so
    the words from Mr. Mills and Ms. Sohn are real. Granting this
    merger grants to Universal sort of the sole right to determine
    what digital services live, what digital services die, what
    they pay, how much they pay, et cetera. And I do not believe
    that this Committee should allow a very clear and significant
    concentration to occur. And I hope that the Committee will
    continue to investigate this and will come to that conclusion.
        Chairman Kohl. Mr. Grainge, if this merger is approved,
    there will be only three major record companies, as we know--
    Universal, Sony, and Warner. It is a basic principle of
    antitrust analysis that reducing the number of competitors from
    four to three carries substantial risk of higher prices to
    consumers by making parallel pricing easier and eliminating the
    possibility of one maverick company engaging in things like
    price cutting. We saw this last year as we reviewed the AT&T/T-
    Mobile merger that, as you know, was ultimately blocked.
        So why should this merger be viewed in any substantially
    different way?
        Mr. Grainge. Senator, the thought that we would constrict
    our artists whom we have invested in and constrict the
    investment that we make in EMI to dissolve the market is--would
    be commercial suicide. And I would also have every single
    artist I have ever signed and every single artist I am ever
    going to sign in a line outside my door saying, ``Get me out of
    here.''
        We have a duty, we have a responsibility--I sit with
    artists--to sell and to bring their music to their audience and
    to their fans and to help them market it. Some of the
    descriptions are not the real operating world. We are here to
    invest in EMI to create more music, to create more options, to
    create more opportunities, and to create more platforms so that
    the music can be discovered and sold to legitimate fans.
        Chairman Kohl. Ms. Sohn, what is your view? Does this
    merger carry the same risks for competition and consumers as
    any four-to-three merger?
        Ms. Sohn. Absolutely. I think the parallels with the AT&T/
    T-Mobile merger are really spot on. If this merger were to go
    through, the top three labels would have 90 percent of the
    market, the top two would have 70 percent of the market, and
    you would have this one super major label that would have the
    ability to pick winners and losers when it comes to digital
    distribution services. And these services lower prices for
    consumers, they provide more choice. So if Universal--if this
    new entity had the ability to basically decide who lives and
    who dies among digital music services, that is going to raise
    prices for consumers, and that is not good.
        Chairman Kohl. Thank you.
        Mr. Lee.
        Senator Lee. Thank you, Mr. Chairman.
        Mr. Azoff, you have achieved a great deal of success and
    wielded a lot of influence within the music industry. If I am
    not mistaken, Billboard ranked you first out of a list of 50 of
    the most influential people in the music industry in 2012. So
    given your background and your experience, I was curious to
    know what you would say in response to the question--well, let
    me just back up a little bit.
        Critics of this merger have suggested--and we have heard
    some of this today--that the majors continue to have near-
    complete control over the music industry, especially when it
    comes to emerging digital distribution models. Do you believe
    this? Do you concur with that assessment? And if so, what is
    your reasoning?
        Mr. Azoff. First of all, you know, any position that I have
    in the industry always flows because I represent artists and
    they trust me. I have been predominantly a manager my entire
    career, and that is the core business I run at Live Nation
    every day. So when I speak, it is not just me saying these are
    my views. This is kind of a view I take from having talked to
    several artists, and, you know, labels traditionally have been
    the last guys to get it. You know, they kind of acquire more
    blocking rights than rights. There has been amongst the
    executives--and I was one at Universal in the 1980s--fear to
    change. I believe that we are at a transformational, wonderful
    point where, through all the criticism and bad that the
    Internet has brought for creative people in the music business,
    you know, the time is here and now that they can do it
    themselves.
        You know, people that we represent like Jason Aldean on
    Broken Bow Records, currently Calvin Harris on Ultra Records,
    you know, I do not know why they are not on these charts,
    because they have exploded. A band from England called One
    Direction, you know, the music basically came off of Sirius/XM
    Radio. It is a Sony act. But, you know, these are exciting
    times where acts are happening quicker, careers are being made
    quicker that are translating----
        Senator Lee. Is that tending to diminish the influence of
    the majors?
        Mr. Azoff. Yes. My point exactly.
        Senator Lee. So with this particular merger, do you have an
    ongoing concern that--creating an even bigger major out of the
    biggest major that currently exists, aren't you concerned that
    might cause some problems?
        Mr. Azoff. No. I actually think that it fosters artists to
    consider the independent sector or do it themselves even more.
    So from the artists' point of view that I talk to, the less
    majors there are, the more options there are. And, in fact, for
    those--and there are artists that require incredible investment
    that do want the major label experience--the fact that there
    will now be a vibrant Capitol Records, which Universal has
    committed to staff, it is actually, you know, it is the best of
    both worlds to me because you have now got more room for the
    independents, but you also have a more vibrant Capitol Records
    for those artists that do choose to want to be in that sector.
        Senator Lee. So the impact on independent labels and
    unsigned artists would not necessarily be a negative one, in
    your opinion?
        Mr. Azoff. It certainly might be a negative when I--you
    know, most of the artists that I speak to consider it a
    positive.
        Senator Lee. OK. Ms. Sohn, I wanted to ask you a question.
    In your written testimony, you state that EMI is not a failing
    firm under antitrust analysis. Now, to my knowledge, neither of
    parties has suggested that EMI is a failing firm, but they have
    alleged that the merger might well result in what I think they
    describe as just a more efficient allocation of EMI's
    resources.
        Do you believe that this proposed merger could or would
    result in a more efficient use of EMI's resources?
        Ms. Sohn. I think what this merger would do is eliminate a
    maverick competitor, and that is not good for consumers, that
    is not good for the market. As I said before, they were the
    first label to take digital rights management off of their
    iTunes. They were the first to license to any music service
    that they did not own. They were the first to do a digital
    download. They did a David Bowie song in 1996.
        So the fact of the matter is that EMI continues to push and
    push and push this industry to embrace digital technologies
    that they really have had trouble embracing. It kind of makes
    me laugh to hear some of the folks to my right now say how
    wonderful digital technologies are and these digital music
    services where I really think it actually scares the living
    daylights out of them because these services have the potential
    to eliminate the middle man. And they lower costs for
    consumers, and when you lower costs for consumers, you also
    lower your profit margin.
        Senator Lee. I cannot imagine there is any player in this
    market that is not scared by the digital revolution in some way
    or another. That part is understandable. You are not suggesting
    that the fact that there is this fear of the uncertainty
    associated with the technology itself is indicative of a desire
    to create anticompetitive effects?
        Ms. Sohn. No, but I am saying it provides an incentive to
    try to control the technology, to try to take a piece, as
    Universal has often done, try to take a piece of these
    services, charge excessive licensing rates, deny licensing. I
    mean, that has really been the history of Universal, is
    litigation, excessive licensing fees, denying licensing fees,
    and taking a piece of these services.
        Senator Lee. So an increased opportunity and an increased
    incentive.
        Mr. Grainge, do you want to respond to that? And while you
    are at it, do you want to also respond to a claim that was made
    a few minutes ago by Mr. Bronfman about the terms of the deal,
    the $1.9 billion being paid basically risk-free to the current
    owner of EMI?
        Mr. Grainge. I can only continue to repeat what I have
    said, that it would be creatively insane for us not to work
    with as many digital services as possible. I have heard AT&T
    mentioned here a couple of times. We have no direct
    relationship, billing relationship, with the consumer. The
    analogy just does not work. Our relationship, everything that
    we do, is to create business. I keep using this word ``duty.''
    We have a duty to the people that we sign, whether or not they
    were signed in 1970 or whether or not they are signed tomorrow
    afternoon. They come to us to market, to sell, to create, to
    work with them on their music on a global basis, and that is
    what we do.
        I think in terms of some of the other comments--we
    negotiate. Negotiation in a free market is the way a free
    market is constructed, and everybody who sits with me on this
    panel today who is in a negotiating position where you are
    making agreements will, I hope, agree with me. And we are very
    proud of what we do. I have spent my entire life, my entire
    career protecting artists and trying to create business and
    trying to create opportunity. And that is what I am going to
    spend, hopefully, the next 33 years doing as well.
        Senator Lee. Thank you. I see my time has expired.
        Chairman Kohl. Thank you, Mr. Lee.
        Senator Franken.
        Senator Franken. Thank you, Mr. Chairman.
        Mr. Grainge, first I want to thank you and your staff for
    getting the information I requested yesterday. As I mentioned
    during our meeting, I was very concerned when I heard that
    major record labels like yours and Warner's are requiring
    digital platforms to turn over a piece of their equity as a
    condition of licensing your music library.
        Let me quote your predecessor from 2008, Doug Morris. He
    said, ``No one is going to build a business off our backs, if I
    can help it, without us being a part of it.''
        He went on to say, ``If one of these digital startups
    becomes a big enterprise and it is off our product, it seems to
    me that we should own part of it.''
        Now, I understand this does not happen in every digital
    deal, but I worry that if your market share--and you said you
    negotiate, and market share counts in a negotiation. That is
    what you do. You negotiate. That if your market share swells to
    approximately 40 percent, you will have every incentive to
    demand more equity, a larger cut of ad revenues, of upfront
    payments, and other onerous terms from online startups as a
    condition of turning over your content.
        Can you explain to me why this is not the case?
        Mr. Grainge. Well, firstly, in terms of what my predecessor
    said, who is a great guy, I disagree with that.
        Senator Franken. OK.
        Mr. Grainge. It is in our complete interest to create as
    many opportunities for the music that we create so that
    consumers can buy it. In terms of our deals, we have well over
    100 deals in the United States. They probably run into hundreds
    and hundreds of deals throughout the rest of the world. We are
    completely technologically agnostic. However consumers want to
    buy their music, whether or not it is on a phone or whether or
    not it is through a stream with a subscription model or ad-
    based, we love it.
        Senator Franken. OK. Well, let me go to Ms. Sohn on that,
    because there is no doubt that the music industry has been
    turned upside down several years with the explosion of digital
    platforms, and that is the subject I am talking about right
    now. And Mr. Grainge has repeated this over and over again. He
    would be insane not to let every platform that comes to him
    play his music.
        Yet I understand from your testimony that Deezer, a music-
    streaming service that expects to be in 200 countries by the
    end of this month, has not been able to work out a deal with
    Universal that will allow it to launch in the U.S. This seems
    at odds with what Mr. Grainge is saying, and it seems to add
    credence to the idea that Universal will exploit its market
    position to the detriment of startup companies.
        Can you explain what happened in the Deezer case and
    whether we should be skeptical of Mr. Grainge's contention that
    they are doing everything possible to cut licensing deals with
    digital platforms?
        Ms. Sohn. Thanks. So the Deezer situation is actually worse
    than you portray it because Universal sued Deezer in France
    because it did not like the fact that it was providing five
    free songs in its so-called freemium tier, so that is the tier
    that has ads on it. And it is interesting in France there are
    very, very detailed regulations that regulate the music
    industry and regulate these digital music services. So
    Universal sued Deezer under these regulations, and the French
    court not only sided with Deezer, but it said that Universal's
    behavior was ``an abuse of a dominant position.''
        So, again, this is a pattern of lawsuits. Universal sued
    the video site Veoh, which won in court, was found to be legal
    in court. It was the first to sue the music-streaming service
    Grooveshark. It did not license to Beyond Oblivion, a Fox
    service that never launched. It raised its fees on eMusic so
    high that it was forced to raise prices, and it has equity
    stakes in MOG, Spotify, and Vevo.
        So that is the modus operandi. I do not consider that
    embracing digital music services. I consider that trying
    desperately to either get a piece of it or stop them.
        Senator Franken. OK. Mr. Grainge, I want to give you an
    opportunity to respond to that, but since Mr. Mills has to fly
    away, I want to make sure that I get a chance to talk to him in
    this round.
        Mr. Mills, I had a meeting with Universal yesterday, and,
    you know, every individual I liked. I think all of you probably
    are friends, and for good reason. You are all nice people.
        [Laughter.]
        Senator Franken. And we had a great time.
        Anyway, but someone in that meeting said that a single
    artist could make or break a digital platform, because today's
    consumer of digital platforms expect every song in the universe
    to be on that digital platform, and if one artist is not on
    that, they will go on social media and tell their friends, ``Do
    not go on this because not every artist is on it.''
        Now, I understand your artist, Adele, has chosen to keep
    her songs off of Spotify. Is that true?
        Mr. Mills. Some of them, yes. Most of the most recent
    album.
        Senator Franken. OK. Now, do you think that has impacted
    Spotify's ability to succeed? And what would you say about this
    argument that if you had one artist with one song missing, it
    will bring down a digital platform? That does not seem to hold
    for me.
        Mr. Mills. No, I think that is an unsustainably extreme
    position. Having said that, though, we believe with
    independents that services that provide the widest possible
    range of music will do best. If you look at iTunes and Spotify,
    for example, they both do that.
        Adele's decision to keep most of her music off Spotify has
    been her own decision, not ours. We are great supporters of
    Spotify. I think that clearly any digital platform needs big
    songs. It needs the ``must-have'' repertoire, which is where
    Universal's power and dominance and control is of considerable
    concern to us because no service can exist without Universal.
    And I think as the lady to my left mentioned, most tellingly,
    when Universal came on to eMusic, eMusic was a platform
    dedicated completely to independent labels and independent
    artists. They realized over time that they could not sustain
    their business with just independents. They gradually brought
    on the majors. Universal was the last one to be brought on, and
    when they brought them on, they changed their terms of trading
    completely. The front-line prices went up, back-line prices
    went down, and the service became a completely different
    animal, such to the extent that we decided we didn't want to
    work with it anymore. So Universal's dominance in that
    particular instance changed the nature of that service.
        Senator Franken. Well, thank you. My time is up. I hope we
    can get to a second round. Thank you, Mr. Chairman.
        Chairman Kohl. Thank you, Senator Franken.
        Senator Blumenthal.
        Senator Blumenthal. Thank you, Mr. Chairman, and thank you
    for holding this hearing. And I would like to thank all the
    participants for being here today, and I hope that, just as you
    are friends of Al Franken now, you will be friends of all of us
    at the end of it. But thank you for being here.
        You know, the American Antitrust Institute submitted an
    analysis, which no doubt you have read, showing that market
    share in the digital and physical music marketplace has been
    virtually constant over the last 6 years, and those shares have
    stayed constant regardless of these major technological
    revolutions in recording and distribution costs. And all of the
    four major labels have retained their hold on 90 percent of the
    market.
        In the ordinary antitrust analysis, that would bespeak lack
    of significant competition. In the ordinary antitrust analysis,
    reducing competitors, assuming there is competition from four
    to three, would sound major alarm bells. It might even be
    regarded as a five-alarm fire. And, in fact, Ms. Sohn draws the
    analogy to the AT&T/T-Mobile situation where, exactly as here,
    the number of competitors went from four to three.
        Is there something about this industry that makes it so
    unique that we should not apply ordinary antitrust analysis,
    Mr. Grainge.
        Mr. Grainge. I think that market share in this industry is
    far less relevant than maybe in any other industry. As I said,
    telephone analogies and consumer relationships in my opinion
    are not relevant. We do not have a direct relationship with the
    consumer. And I think that the artists make the market. I think
    that you are as good as your market, depending on what choices
    you have made and what artists you have signed and how well you
    have delivered them to the market and how well you have created
    a demand for them.
        We have heard about Adele and, Mr. Mills, I wish we had
    Adele, but we did not. And Adele has had probably one of the
    biggest-selling albums for maybe the last 10 years.
        Senator Blumenthal. And I understand that point,
    essentially--Mr. Azoff makes it very well--that artists have
    the kind of access to their fans that perhaps makes it somewhat
    distinctive. But should we simply disregard the normal
    antitrust analysis here? Let me pose that question to anyone on
    your side of the table who would like to--or any of the
    witnesses. Mr. Mills.
        Mr. Mills. I would like to answer it, if I may. I think any
    ordinary antitrust analysis is even more crucial in this
    because we are all monopolies. I have a monopoly on Adele's
    music. Mr. Grainge has a monopoly on Lady Gaga's music. The
    whole nature of copyright is that you can only get one artist
    from any source. It is not like airline tickets which are
    interchangeable, as I said in my address. We are all little
    monopolies. And I think that makes antitrust far more crucial
    in our IP-based industry than in any other.
        Senator Blumenthal. Ms. Sohn.
        Ms. Sohn. So antitrust law addresses market power, right?
    It does not address market share so much as the amount of power
    you can impose on a market. And as we said before, because this
    new entity would control 42 percent of the market, it could
    impose its will on any digital music service. That is what is
    really, really important. And I think you cannot also forget
    the fact that for corporations copyrights last 90 years. So
    that is another monopoly on top of a monopoly. So you are not
    only in control of the--each label not only has its own
    artists, but those copyrights are also a monopoly that lasts 90
    years.
        Mr. Azoff. I think that we are a very unique industry, and
    the point where, you know, I guess you could say that Apple was
    built on the back of recorded music a bit, you know, the
    company was struggling. Sony, the Sony Walkman certainly saved
    Sony; the creative works of artists helped that. So I do not
    think you can apply--you know, we are a quirky, crazy industry
    that relay, you know, its people's creative works. What I love
    about what is going on is for the first time in my 43 years in
    the business, artists have real power. So I just do not think
    you can apply market share standards to any of it for that
    reason.
        Mr. Faxon. I would like to add that I think that what I
    have been hearing from those who are opposed is a view of a
    market that is 10 years old. We are in a very different place.
    In 2002, the major record companies tried to come together to
    control distribution in the online world. They failed dismally.
    It was a clarion call to an industry that thought that it could
    control the way that music could reach consumers. It could not.
    The consumers broke through. They found the music wherever they
    could find it. They brought it, and that is why no music
    company--no music company--can stand away from licensing rights
    into the marketplace. It will not have a business.
        And Mr. Azoff's customers and Mr. Mills' artists will never
    sign on to those labels because they will not be in the market.
    They will have denied access, and that means that they are out
    of business. And it is a fundamental shift in the way in which
    this market has worked.
        Senator Blumenthal. My concern is that your argument or
    justification for the merger seems to depend on asserting that
    antitrust principles and precedent such as we would apply to
    almost any other industry simply should not be applied here
    because it is a unique or quirky industry that is fast-changing
    and where fans have certain powers, which I think is a heavy
    lift.
        Mr. Faxon. Senator, I would not say that. I would not say
    that antitrust principles should not be applied. They
    absolutely should be applied. The question in antitrust is not,
    as Ms. Sohn said, about what your market share is. It is about
    whether or not you can exercise market power. And the balance
    of power--the other services create your access. They have the
    power to keep you from having access. There is an equalizing
    force here, and that force is set really for the first time in
    our experience by the consumer because the consumer decides
    where they are going to actually find their music.
        And so the power is sitting in the consumer's hands, and I
    think that that changes the business structure, but it does not
    change the analysis. It is about where the market power is. And
    I think if you look at Ms. Sohn's discussion, she very clearly
    talks about the empowering of artists and the empowering of
    consumers. But nowhere does she bring that back to an analysis
    of antitrust. If they are empowered, why is it that the record
    company somehow is a blockage? They control where the market
    goes, and we have to deliver against it. And every time this
    industry has fought that, it has lost. And look at how much it
    has lost.
        Senator Blumenthal. My time has----
        Mr. Faxon. It has lost half of its value. Sorry.
        Senator Blumenthal. My time has expired. Mr. Bronfman I
    think he wants to add something, so with the Chairman's
    permission----
        Mr. Mills. Mr. Chairman, sorry. May I be excused? I
    appreciate that. Thank you very much.
        Chairman Kohl. Thank you, Mr. Mills. We appreciate your
    being here.
        Mr. Bronfman. Senator Kohl, thank you for giving me some
    time to respond.
        First of all, I was interested to hear Roger say that the
    answers that we have given are 10 years old. I would say at
    least we have given some answers, because I have not heard
    anyone on my right actually answer a question from the Senators
    that they have asked.
        What I would say is when we talk about market power, let us
    just ask a very simple question. If you are a digital startup,
    who do you go to to get a license? With all respect to Mr.
    Azoff, who may be the most powerful man in the music industry,
    they do not go to Mr. Azoff. They do not go to Live Nation.
    They do not go to Front Line. They go to Universal, they go to
    EMI, they go to Warner, and they go to Sony. And if Universal
    and EMI together have half of the hits and 40 percent of the
    market, there is only one place any digital startup must go.
    Everyone else becomes irrelevant. They go to Universal.
        Lucian, whom I have great respect for and great friendship
    for, said he hopes we would agree that we all negotiate. Well,
    licensing is about negotiation, but Warner historically has
    always sought its market share in its licensing deals so that
    its revenues would represent equal to its market share.
    Universal has historically sought greater than its market share
    in its negotiations with the licensing deals. That is a
    negotiation. It is a free market. But let us not pretend that
    all licensing is created equal. Licensing is not created equal.
        In addition, Universal talks about how many licenses they
    do. Well, let me tell you, at least 50 of those licenses are
    exclusionary licenses. They are licenses where only Universal
    Music is licensed and other music companies will be invited in
    some time later.
        So, again, there may be hundreds of deals, but they are not
    all created equal. They are not all created in the same terms
    and conditions. And so the issue is not whether or not
    Universal will or will not license. Sometimes they will,
    sometimes they will not. But it is also about the terms on
    which a market-dominant power can license and will license.
        Chairman Kohl. Thank you.
        Senator Blumenthal. Thank you, Mr. Chairman.
        Chairman Kohl. Mr. Grainge, you argue that record companies
    are not so important in this new digital age. An artist does
    not even need a record company to distribute music on the
    Internet. Nevertheless, of the top-selling songs in 2011, the
    four major record companies distributed 96.5 percent of them,
    and the four major record companies controlled or distributed
    100 percent of the 100 titles making up the Billboard Hot 100
    chart for 2011.
        Don't these stats demonstrate as clearly as can be that the
    continued importance of the four major record companies is
    intact?
        Mr. Grainge. Senator, I am not aware of any of those stats.
    All I can continue to say is we try and create as much quality
    music and music that consumers want to buy, and that is what we
    do and that is what we are dedicated to.
        Chairman Kohl. Mr. Grainge, to follow up, the Wall Street
    Journal reported this week that, speaking at a conference in
    March of 2011, the chief financial officer of your corporate
    parent, Vivendi, Philippe Capron said, and I quote: ``Given our
    market share in many territories, North America, and most
    European countries, we could not completely buy the recording
    businesses of either EMI or Warner.''
        Do you know why a senior executive in your corporate parent
    held a view which is apparently contrary to yours just a year
    ago?
        Mr. Grainge. Senator, I understand--I have heard the quote,
    and I understand why you ask me about it. I cannot speak for
    him. I was not there. He is a financial person at our corporate
    parent, and I disagree with him.
        Chairman Kohl. Mr. Bronfman said a few minutes ago--and,
    incidentally, he came to visit us the other day, and he said
    you are among the smartest and toughest, most effective
    executives around, so it does not detract from his admiration
    for you, nor ours. To reiterate what he said just a minute ago,
    you do not seem to answer questions very completely or very
    accurately.
        [Laughter.]
        Chairman Kohl. Which is part of your smartness and
    toughness. Would you agree with that, Mr. Bronfman?
        Mr. Bronfman. I would agree with almost anything you would
    say, Senator.
        [Laughter.]
        Chairman Kohl. You are pretty smart yourself.
        Mr. Grainge, we understand that you argue that we should
    not worry about this merger because illegal music downloading
    makes it practically impossible for record labels to raise the
    price of music when consumers can just go to illegal download
    sites they can go to and get music for free. However, in April
    of 2009, Apple iTunes, the Nation's leading online music
    download service, raised its prices by 30 percent from 99 cents
    to $1.29 per single for most new releases.
        Despite this 30-percent increase, consumers continue to pay
    for the music. The number of singles downloaded actually
    increased from about 5 million per day in April of 2009 to over
    9 million a day in January of 2010, less than a year later. All
    of these consumers could have obtained this music for free on
    illegal sites. Doesn't the experience with the Apple iTunes
    price increase in 2009 show that consumers will accept price
    increases for music?
        Mr. Grainge. Senator, the original launch price was exactly
    what it was supposed to be--a launch price. And it was
    something which Apple and Steve Jobs, who I got to know over a
    period of time, basically pulled out of the air.
        Over that period of time since the launch of iTunes, there
    was one price increase in a 9-year period. As part of that
    deal, Apple lifted the restriction of the digital rights
    management, which meant that the people who bought the
    downloads could share them and move them around their own
    devices. We increased the quality in the bits of the sound
    quality, and they also at the time went to variable pricing,
    and there were tens of thousands of tracks which also reduced
    in price.
        Chairman Kohl. Ms. Sohn, what is your view? Why would
    consumers pay 30-percent higher prices for singles on iTunes
    when they could just download the music from illegal sites for
    free?
        Ms. Sohn. Well, it is because there is absolutely no
    evidence and the proponents of the merger have not presented
    any evidence that piracy exerts any downward pressure on prices
    whatsoever. And the fact of the matter is last year alone
    consumers spent over $2.5 billion on digital music, so that
    shows a real desire there to access music legally. So if piracy
    was a factor, why didn't they just go get it for free? I mean,
    if consumers are willing to pay an average of $10.40 for a
    digital album, why would they suddenly resort to piracy if that
    price went up to $11.
        Mr. Bronfman's company provided some numbers to the FCC
    showing that pirates are actually a really very, very small
    percentage of music buyers and that, if anything, what Mr.
    Grainge has to worry about are people that listen to the radio
    because they are the ones that really do not buy music.
        So piracy has had absolutely no effect on prices
    whatsoever, and nothing I saw in any of the testimony of the
    proponents showed otherwise. It is just hand waving.
        Chairman Kohl. How do you respond to that, Mr. Grainge?
    Then Mr. Faxon. Mr. Faxon, you first?
        Mr. Faxon. Yes, I just think that we have to understand the
    setting in which this industry is. In the world of music, over
    the last decade plus, more than half of the sales of the
    industry have disappeared. And in that same period, a vast
    amount of music has been consumed through pirate sites and in
    illegal ways--some quasi-illegal, some quite illegal. So there
    has to be an inference that any logical person would take that
    there is a relationship between the pirate world and the
    legitimate world, and that consumer demand, consumers' desire
    for music, has not declined. Their purchasing behavior has.
        And so price has something to do with purchasing behavior.
    It is our role, our job, to try and see whether we can find a
    way to entice consumers back into the marketplace and pay so
    that our artists get paid and that the entire cost of the
    industry gets--so there is a constraint, and some people
    clearly will go into the market and buy in only a legitimate
    way. But half the demand has gone--half the actual purchasing
    demand has disappeared, whereas consumption has gone up. So I
    think it is a little disingenuous--I would say it does not have
    any impact.
        Chairman Kohl. Ms. Sohn, do you----
        Ms. Sohn. This one really deserves a response because the
    reason the revenue went down was because they were selling
    nothing but CDs, they were found guilty of price fixing by 43
    States and the Federal Government, and they stopped selling
    singles. That is why--so your revenue went down because once
    you were found accused of--found guilty of price fixing your CD
    prices and then started selling singles again, people bought
    the singles. They did not want to buy ten songs they did not
    want for two songs they did. That is why revenues have gone
    down. But as everybody admits now, your digital sales are
    skyrocketing. It is just that--and both albums and singles. So
    that is why your revenues were cut, not just because of piracy.
        Mr. Faxon. I think one of the things that would be useful
    is to ask for corrections of the record after we do this
    because I think Ms. Sohn has misstated the history, and rather
    than take your time with arguing over that, it would be good
    for her to relook at her testimony and come back with a more
    accurate----
        Ms. Sohn. Look at the report filed by Public Knowledge and
    Consumer Federation of America. It is all in there.
        Chairman Kohl. All right. Before we turn to Senator Lee,
    Mr. Azoff.
        Mr. Azoff. Let me just tell you a quick story of how piracy
    impacts an artist. An artist I started with at the University
    of Illinois 40-some years ago retired about 20 years ago. His
    earnings from his artist royalties and his writing and
    publishing were around $400,000 a year. Traditionally in the
    industry, that would go up every year. He came to see me
    recently. His earnings from this very active catalogue have
    dwindled to $68,000 a year. The only place you can point to is
    piracy, because the catalogue sold steadily, steadily,
    steadily, and the minute free music on the Internet came, it
    just fell off a cliff.
        Chairman Kohl. All right. Mr. Bronfman.
        Mr. Bronfman. I would not sit here as someone who has run a
    record company for the last 17 years and say that piracy has
    had no effect. I think it has had some effect. But I would also
    agree that also another large effect is that when iTunes came
    along, we stopped selling albums and started selling singles.
    And so you had people interested in buying, but they were
    finally able to buy the song or two that they liked, not the 10
    or 12 that we had forced them to buy in the album world.
        The reason I make that point is if a new startup came with
    a business model such as that that threatened the industry,
    which in some ways created risk to the business model, and you
    had half of the music controlled by one company, why would that
    company license a business that threatened the status quo, that
    threatened either its dominance or its business model?
        Now, the truth is that Apple has been a great thing for the
    U.S. economy, but it is not clear that, given what we know
    today, that a dominant company would have allowed an iTunes
    startup to occur, or the next one, because 6 years ago there
    was no Facebook, 8 years ago there was no Google, 12 years ago
    there was no iTunes. We do not know what is coming next. And
    when you give one company the power to choose whether or not
    those businesses can even begin, I think it trips the line of
    reasonableness.
        Chairman Kohl. Senator Lee.
        Senator Lee. Thank you very much, Mr. Chairman.
        Before we proceed any further, I just wanted to point out
    that under almost any definition of the relevant markets that
    we could think of, I think most of us in the room would have to
    agree that this merger, if it proceeded, would result in a
    pretty significant degree of concentration. But we also have to
    remember that this is not the end of the analysis. You know, as
    Section 5.3 of the merger guidelines make clear, on page 19 of
    the 2010 edition, this is not the end of the analysis, and the
    merger can still proceed where other competitive factors
    counteract the potentially harmful effects of increased
    concentration. And so that is a lot of what we have to look at
    here. It is not a simple matter of just looking to whether or
    not it is going to result in increased concentration. I think
    that is pretty certain that it will.
        So with that in mind, Mr. Faxon, I wanted to ask you a
    little bit about EMI. EMI has passed through a number of hands
    in recent years. You know, for a while it was owned by the
    private equity firm Terra Firma, and then it was owned by a
    banking firm, Citigroup--neither of them giants in the music
    recording industry. Giants within their own realms, of course,
    but their specialty, their expertise, is not in music.
        So while the job that Citigroup has done, for example, is
    admirable, there are some observers who perhaps are excited to
    see EMI owned by a member of the music industry.
        So my questions for you are: First, what do you think music
    industry ownership for EMI might do for EMI? And then,
    secondly, how do you think revitalization of Capitol Records
    might affect the market?
        Mr. Faxon. I think obviously Citibank is not a natural
    owner of a music business. It has enough troubles on its own to
    consume its time.
        What a music business needs, as Mr. Azoff said, is it needs
    stability because, remember, our product is not a disc. It is
    the output of human beings who need to be motivated and need to
    feel safe and protected as they pursue a very dangerous career.
    Think about yourself the first time you ever got up on stage
    and had to give a speech.
        Senator Lee. And I did not even have to sing.
        [Laughter.]
        Mr. Faxon. Right, and you did not have to sing. So what we
    lose in these events, in these discussions, is that we are
    talking about human beings and the lives of human beings. Our
    artists depend on us to be able to be with them and help them
    achieve the success that they dream about. That is what our job
    is. And with that comes a responsibility of being there for
    them as they develop.
        So one of the problems that has existed at EMI is that
    sense of instability, the sense that what is going to happen to
    that business going forward. So coming to a home where there is
    a stable environment, where the team that helps the artist
    develop their music and helps them find fans to love that
    music, are going to be with them for a while, is a huge--it is
    a massive improvement. And, you know, saying that is music to
    my ears to hear Lucian talk about trying to keep Capitol
    Records and build it back into the important label that it has
    been in the past, that is a fantastic thing, and the people at
    EMI are grateful for that.
        But consumers should be grateful for it because it is--it
    will be a creative engine. It will be a place--an engine room,
    and it will be a place where more music will be provided into
    the market. And we are in the innovation business. You know,
    think about it. Our product is new, creative works on a
    constant flow basis. That is what we are trying to bring in. If
    consumers do not like it, we do not do well. If consumers do
    like it, we do much better. It is as simple as that. And so it
    is a good thing to have a home that wants to create a stable
    base for our business.
        Senator Lee. So you are saying it will result in the
    creation of more creative material, whether the consumers like
    that or not.
        Mr. Faxon. I believe so, yes.
        Senator Lee. OK. Mr. Bronfman, let us turn to you for a
    minute. In 2009, EMI became a pioneer of sorts when it became,
    I think, the first major label to license its music without
    digital rights management, and that led, I think, to an
    industry-wide adoption of DRM-free music buying and selling.
    EMI was able to initiate a fairly significant change in the
    industry, even though it had only 10 percent of the market at
    the time.
        So my question for you is: In a post-merger market, in a
    market following a merger between Universal and EMI, do you
    think Warner with, say, 20 percent of the market or Sony with
    30 percent could perhaps be able to initiate a successful,
    sequential contracting process?
        Mr. Bronfman. Senator, I would like to answer that
    question, and if you do not mind, I would like to comment on
    the previous answer as well.
        Senator Lee. Sure.
        Mr. Bronfman. I think that the fact that EMI in the
    instance you mention or Warner in other instances or Sony or
    Universal in other instances speaks to the importance of this
    competitive balance that currently exists. As the market
    becomes more concentrated, as one company essentially controls
    half of the hits and 40 percent of the overall market, the
    ability for a third company to influence the outcome becomes
    smaller and smaller.
        I cannot say for sure that Warner could or could not, but,
    clearly, it will be less able to tomorrow if this merger is
    approved than it would be able to today.
        Senator Lee. Even with its own particular market share
    being unchanged from what it was.
        Mr. Bronfman. Yes, because essentially at 50 percent of the
    hits, Universal can do what it wants, period. Universal can say
    no to anything. And so, yes, sure, Warner can say yes to
    something, but at 50 percent of the hits, Universal can say no
    to anything. And I would just----
        Senator Lee. Would you really phrase it as 50 percent of
    the hits? I mean, is that the right way to look at it?
        Mr. Bronfman. Well, it was last year. Some years it is even
    greater.
        Senator Lee. Right. But you are not necessarily saying that
    represents 50-percent market share, but----
        Mr. Bronfman. No, sir. I am saying the overall market share
    is 40-plus percent. A share of the hits is 50 percent.
        Senator Lee. We do not want to punish them for having a lot
    of hits, though.
        Mr. Bronfman. I complimented Mr. Grainge to Senator Kohl. I
    compliment the work that he has done. And I think if Universal
    were able to get to 42-percent market share through its own
    sweat and hard work, more power to them.
        Senator Lee. Maybe they should be required to send some
    really bad artists--I can help them find some.
        Mr. Bronfman. By the way, we both manage to find some
    really bad artists from time to time.
        [Laughter.]
        Mr. Grainge. We agree.
        Mr. Azoff. I do not manage any bad artists.
        [Laughter.]
        Mr. Bronfman. No. You just wait for all the others to fail,
    and then you pick them up.
        So the notion here is that if a company can grow to
    whatever size on its own and does not abuse that market
    position, the Government should have no role in that
    whatsoever. But when a company is seeking to acquire a market-
    dominant position, Government does have a role. And in my view,
    Universal is trying to seek a market-dominant position, and I
    think this Committee should look at that and I hope would help
    the FTC to look at it and ultimately use its influence to see
    that this merger is not consummated.
        And just one quick point to Roger's comment about finding a
    music home. I think the issue is less about ownership than it
    is about leadership. When my partners and I acquired Warner
    Music, Warner had traditionally been owned by Time Warner,
    which has many entertainment assets, media assets, one of the
    great media companies in the world. But music within that
    environment was an orphan. It was small within Time Warner. It
    was not that important. And the music division was very
    dispirited. Even under a private equity ownership that then
    came along with me, Warner succeeded much beyond what people
    thought originally, and we created a very successful company
    out of that.
        So I think the issue is not whether or not a music company
    needs to be in a music home. A music company needs to be with
    leadership that understands what it needs. And I think as Roger
    described the needs of a music company, I would agree with him.
    It needs stability, it needs sensitivity, it needs leadership.
    But that can come from many places. It does not necessarily
    only come from a larger music company.
        Senator Lee. And if you could point to any one metric that
    troubles you most, is it market share or is it the share of
    hits in recent years?
        Mr. Bronfman. It is market power, Senator. It is the power
    to determine the outcome of so many different things.
        You know, in the digital download world, hits are critical,
    and so Universal has a disproportionate weight and market power
    in the digital download world. But, interestingly, as the
    subscription world--Spotify--grows, what are we discovering. We
    are discovering that catalogue is actually much more important
    in that world than it is in the digital download world. EMI
    happens to control, thanks to the work of people for the last
    five decades, ten decades, one of the greatest catalogues ever
    amassed in human history. When you put that catalogue together
    with Universal's catalogue, you have enormous market power in
    the streaming world.
        Senator Lee. But, of course, it is not about market power.
    It is not only about market power. You know, the question we
    have to ask is whether that market power manifests itself--
    whether it is wielded in such a way that it results in harm to
    consumer welfare.
        Mr. Bronfman. Senator, with all respect, that may be the
    question that you ask. My question is: If you grant a company
    market dominance by granting them the kind of market power that
    this transaction gives to them and then simply hope that they
    will wield that power responsibly, I do not think that
    personally is the right approach to antitrust policy.
        Senator Lee. OK. My time has significantly expired.
        Mr. Azoff. Can I add one comment to what Mr. Bronfman said?
    Unless I am mistaken, Universal licensed Spotify first and
    Warner was the last one in, number one.
        Number two, when you talk about EMI's catalogue, I also
    believe that, you know, what is the real worth of the biggest
    thing about the EMI catalogue is the Beatles. They were not on
    iTunes until recently. If you believe the printed reports, I
    believe the Beatles hold, you know, a big say if not a final
    say on anything that goes on digitally with that catalogue. I
    do not think that the digital rights to the Beatles flow in
    this deal as simply as everyone thinks.
        Thank you.
        Senator Lee. Thank you.
        Chairman Kohl. Senator Franken.
        Senator Franken. Well, thank you, Mr. Chairman. A few
    things.
        First of all, I do not think, in all due respect to Mr.
    Azoff, I do not think that Universal was the first on Spotify.
    Am I right?
        Ms. Sohn. It was the third.
        Senator Franken. They were the third.
        Ms. Sohn. It was the third after EMI and Sony.
        Senator Franken. OK.
        Mr. Grainge. We were in before Warner.
        Mr. Bronfman. Which makes my point, Senator. That makes my
    point, which is that in this competitive, dynamic world where
    you have four people supporting innovation all with different
    perspectives, innovation is going to survive and thrive much
    more than in a world where one person can determine the
    outcome.
        Senator Franken. OK. I just wanted to make that clear
    because that was my understanding, and I just did not want that
    to stand.
        In terms of Senator Lee's point on Citigroup and EMI, you
    do not think of Citigroup as nurturing, finding and nurturing
    artists, but Vivendi, I might say, was a water company, then a
    transportation company, and then it went into construction and
    waste management, and I do not think it was a media company
    until the 1990s, if I am correct. And, also, when I was at
    ``Saturday Night Live,'' General Electric bought NBC, and we
    were run by Bob Wright, who we used to call ``a toaster
    salesman.'' But he was one of the great chairmen of NBC. He did
    an unbelievable job. So, you know, let us not----
        Mr. Faxon. Senator, I will be sure to tell Vikram that you
    think he would make a great executive in a music business.
        Senator Franken. Well, I do not know him. I know Bob Wright
    and he did a great job. I do not know what point I was making,
    but I think I made it.
        [Laughter.]
        Senator Franken. Mr. Grainge, I promised you a chance to
    respond to Ms. Sohn's comment on Deezer, and I would also like
    you to respond to the quote I read in the Telegraph where you
    said, ``If there was only iTunes providing digital music and
    they tripled my sales, I would be delighted.''
        This seems to undercut what I am hearing from you today
    about your desire--you know, you wish nothing more than to
    expand the universe of digital licensing deals. Can you explain
    that seeming contradiction?
        Mr. Grainge. I think that that quote was probably from 5,
    6, or even 7 years ago.
        Senator Franken. You have changed your mind on that?
        Mr. Grainge. Well, it is probably the last time I spoke to
    the Telegraph.
        Senator Franken. Yes, but they have been--have they been
    able to hear your phone calls or anything like that?
        I do not know the British press. I am sorry.
        [Laughter.]
        Mr. Grainge. The contribution that Apple has made to the
    music industry over this last period has been incredibly
    powerful. We have since that time hundreds and hundreds and
    hundreds of deals worldwide, so in terms of the evidence of
    what we do and what our behavior is, I am actually very proud
    of, and we will continue to deliver our music to as many people
    in as many ways as we can in as many partnerships.
        You have also got to remember that in this game you want to
    keep as many people focused and optimistic about selling music.
    And it is really important that we continue to sell our music
    in every form, as well as CDs and as well as, you know, what we
    call ``physical product.''
        Senator Franken. Could you respond on Deezer in terms of
    how that--that also seems to kind of contradict the record on
    Deezer.
        Mr. Grainge. Yes, I am not aware of the Deezer specifics. I
    was aware that there was a problem in France. There are
    problems in our business every single day of the week. There is
    constant firefighting. There is so much disruption in the
    industry. There is so much disruption in the technology. And in
    some of the things that we are doing, we are making it up as we
    go along in the same way that the platforms are. And we are
    experimenting the whole time.
        Again, I think to highlight----
        Senator Franken. I wish I had a job as exciting as yours.
        That was a joke, too, everybody.
        [Laughter.]
        Senator Franken. You see, it happens to us.
        Go ahead. I am sorry.
        Mr. Grainge. We have hundreds of deals. We manage some 80,
    90 operating companies in markets throughout the world. And to
    pick out two or three or four problems when we have the amount
    of music with the amount of contracts with the amount of people
    that we work with I think is actually unfair.
        Senator Franken. OK, fair enough.
        Ms. Sohn, a ording to the American Anti-trust Institute, it
    took spotify 2 years to work out licensing deals with the four
    majors in the U.S. and this after having had incredible success
    in Europe. Sony and EMI apparently were the first two, right?
    Is that----
        Ms. Sohn. Yes.
        Senator Franken. OK. To step up to the plate, and it took
    several more months before Universal and Warner finally worked
    out an agreement. This also seems to refute Mr. Grainge's point
    that Universal is a leader in cutting digital deals and he
    wants nothing more than to create these deals and create more
    digital platforms.
        Do you agree that Universal appears to have dragged its
    feet in that licensing deal?
        Ms. Sohn. Yes, absolutely. I mean, Spotify was very, very
    slow to come to the U.S. market. It is not yet profitable. In
    fact, it is quite unprofitable.
        I want to actually give you two more examples. I know I
    gave a laundry list before, but I think, again, they continue
    to be--it is more than two or three examples, Mr. Grainge, I am
    sorry to say, that Universal is the third of the four major
    labels to license its catalogue to Google Music. And with Zune,
    you know, Microsoft Zune, it took a piece of every single Zune
    that was sold. So that is another example of either excessive
    licensing, litigation, or taking a piece of the music service.
    And that control is not insignificant. I do not know the amount
    of the control because that kind of stuff is all under
    nondisclosure agreements, but, you know, when you have that
    kind of market power, it is not insignificant.
        Senator Franken. Well, I really--I know my time has run
    out, but I would like Mr. Grainge to be able to respond to
    that. Is that OK, Mr. Chairman?
        Chairman Kohl. Sure.
        Senator Franken. Mr. Grainge.
        Mr. Grainge. We are trying to talk about the future of
    music, how fans can get music. To get into a he-said/she-said--
    and I cannot speak, and neither do I think any of us can speak,
    for the companies for which we are actually being told that
    this is what they said or this is what we did or this is how we
    behaved or operated.
        Senator Franken. I think that what it speaks to is your
    businesses, your companies' recent history regarding
    negotiations with digital platforms when what we are talking
    about here is your market power going to be so large that it
    disrupts that world. I think that is why we are discussing
    that, and I do not think it is just a he-said/she-said. I think
    it is relevant to our discussion.
        Mr. Grainge. Senator, I completely stand by everything that
    I have said, that we license, we embrace as many digital
    platforms and as many business partners as we can. And the
    sheer thought that we would constrict these platforms, that we
    would constrict who we sell to and how we sell and why we
    sell--if we do not sell, we go out of business. Most of these
    companies--we are not talking about nascent, small
    organizations. Some of these are bigger than the entire music
    industry combined. My artists will leave, jobs will go, piracy
    will continue to be rampant, and it is just not feasible that
    we will do anything else other--we have a duty and
    responsibility to the people that we sign, and I have got a
    duty to the people that we invest in as well. We make that
    investment. We have to sell, we have to create, we have to
    discover. And I hope you understand I feel very, very strongly
    about that.
        Mr. Faxon. Senator, I just wanted to add one additional
    thing. The discussion of the length of time of negotiation, we
    are talking about breaking new ground. The music industry is at
    the forefront of where technology is taking our marketplace. It
    is the pioneer. One has to walk that path very carefully. One
    has to understand all of the nuances and elements that go into
    those decisions.
        Spotify is an interesting thing. It is a service that says:
    Here is all the music in the world, take your pick, and do not
    pay anything for it. And maybe--maybe--if you have these other
    mobile services and other things attached, we will get you
    across the border to pay for that.
        Senator Franken. It has advertising.
        Mr. Faxon. Yes, well, they have some advertising. If you
    have been on, you know. But the proposition was free leading to
    a pay tier. No one had ever done it. You did not know what the
    outcome was going to be. And you are setting a structure for a
    future. So you do that carefully.
        But this industry has come forward and done those things.
    It has done things that for many people would be inconceivable
    5 years, 10 years ago. So the fact that it takes 5 or 6 months
    or a year or whatever it takes to get there, the fact that we
    have demonstrated that we get there is something I think is the
    point to take away from this discussion.
        Now, I would ask Edgar why he has not gone along with
    Google Music, why he has not done those things, because I think
    he has been more likely to be the last person in.
        Senator Franken. Well, my time has expired. Mr. Chairman, I
    would turn it over to you and your judgment.
        Chairman Kohl. Thank you, Senator Franken.
        Senator Klobuchar, do you want to make a comment or two?
        Senator Klobuchar. Well, thank you very much, and I am
    sorry for leaving, but as Senator Franken knows, we have had
    floods in Duluth, we had the farm bill, but I also know that we
    are also the home of many great musicians, including Bob Dylan
    and Prince, as well as many other successful bands like the
    Jayhawks, the Replacements, and Soul Asylum, just to name a
    few. And so I thought I would quickly come back to ask a few
    questions here.
        Now, I know some of this hearing has focused on market
    shares, competition, prices, and other economic dynamics, but I
    think it is also important to consider what the impact might be
    on music itself, especially given my State. I guess I can just
    ask all of you this. How do you see how the merger would affect
    music being available to the public, and whether it allows more
    bands to get in and out to the masses and more sounds, or
    whether it has the opposite effect or no effect at all?
        Ms. Sohn. Well, I will start. Thanks for that question. So
    four to three means less choice, and not just less choice for
    consumers but less choice for artists as well. I think a great
    example here is Katy Perry, who was against the merger and now
    all of a sudden is for the merger. Funny how that happens. But
    she was rejected by Universal, and she went to EMI, and she
    loved EMI. So you take EMI away, that is just one less place
    that an artist can go to.
        As far as consumers are concerned, our concern is that if
    you put so much power in one company with must-have music, that
    they will be able to dictate the terms and dictate the survival
    of every new digital music service out there. And that is not
    good for consumers either because those services lower prices
    for consumers, give them more choice, and are generally to
    their benefit.
        Senator Klobuchar. Thank you.
        Mr. Bronfman.
        Mr. Bronfman. Thank you, Senator. Just to say I do not know
    whether past is prologue or not, but in the three mergers that
    have occurred recently--well, two mergers and a restructuring
    that occurred in the music industry recently--the Universal/
    Polygram merger, the Sony/BMG merger, and the Warner
    restructuring--I was involved in two of those three, Universal/
    Polygram and the Warner restructuring. In all three of them,
    the artist roster post-merger or restructuring was reduced
    somewhere between 30 and 40 percent. So there were 30 to 40
    percent fewer artists remaining on the artist roster at
    Universal once it acquired Polygram, about 30 to 40 percent
    fewer artists at Sony/BMG when they were through merging, and
    about 30 percent fewer artists at Warner when we were through
    restructuring.
        So, again, I cannot speak to what is going to happen at
    Universal/EMI, but if past is prologue, you know there is going
    to be less music, not more.
        Senator Klobuchar. Mr. Faxon.
        Mr. Faxon. I do take Edgar's point. I think there has been
    in restructurings and mergers certainly reductions in rosters.
    But I think this is somewhat of a different case. EMI went
    through a very difficult period several years ago under the
    ownership of Terra Firma private equity company. The roster was
    completely--was virtually decimated. And over the last 2 years,
    we have rebuilt that roster, and it is an extremely effective
    one. And what Lucian has been very clear with our staff and
    with us is that his aim is to continue to build beyond that.
        So we do not start with a fat, uneconomic roster, which is
    why rosters are reduced. If you have successful artists, you do
    not cut them out. You cut the ones that are not doing well. We
    are not in that situation. We are in the building mode. And I
    think our track record at the moment is extremely good.
        So I take--Lucian will speak for himself, but I would take
    his word for it that he is going to invest more and increase
    the amount of artists on our roster.
        Senator Klobuchar. OK. Do you mind if I go on or do you
    want to answer as well, Mr. Grainge?
        Mr. Grainge. Yes.
        Senator Klobuchar. OK.
        Mr. Grainge. As I have been saying, Senator, for EMI, more
    investment, more music, more choice for consumers, more
    platforms, and I think the point that Roger made is absolutely
    spot on. Labels fight to keep successful artists, and also you
    fight to keep and nurture artists that you believe in that can
    be the successful ones of tomorrow. And I said it actually in
    my opening statement. The company is on a really much greater
    sounder footing than it was probably 18 months to 2 years ago,
    and I am absolutely determined to build on the success and on
    the platforms, the music platforms, the artists that are signed
    within the company, to take them to the next level and to take
    all the stakeholders in the entire creative process to the next
    level and give them certainty and give them support and give
    them investment.
        Mr. Azoff. I think from the management perspective, artists
    will be happy that EMI is going to be in a period of spending
    more, but also in the independent sector, which has been
    growing, a Calvin Harris at Ultra Records, a Jason Aldean at
    Broken Bow Records, Joe Walsh last week with a number 12 debut
    on Concord Records, that, you know, having less majors will
    embolden artists to take more shots with independent labels,
    and I think it will cause independent labels to take more risks
    also.
        Senator Klobuchar. The second and last question I will ask,
    and I will put some more in the record, is just how this merger
    could impact retailers. Why do I care about this? We are the
    home of Target and Best Buy in Minnesota, and I care about it
    for our customers as well. And there are some that say that
    this could significantly impact negotiations with physical
    music retailers that I think are very important to the music
    business and had a hard time in recent years, and then others
    say that obviously they believe it would not have any effect on
    negotiating leverage. And if you could, maybe just one person
    on each side could give me an answer to that. Mr. Grainge.
        Mr. Grainge. If we do not have strong, committed music
    retail, then the physical music market will disappear even more
    than it has done. There are no small Mom-and-Pop kind of
    stores. So many of the individual specialist chains have
    unfortunately gone out of business. If we do not sell to them,
    if they do not carry our music on their shelves, then we will
    go out of business. So we are absolutely desperate, whilst this
    market is still as high as 50 percent on physical, to do
    whatever we can to support the Targets and the Best Buys.
        Again, I feel very strongly about that.
        Senator Klobuchar. Thank you.
        Mr. Bronfman.
        Mr. Bronfman. Yes, so Lucian keeps saying how much he wants
    to support both digital and physical retailers, and I have no
    doubt that that is true. I think the issue is on what terms.
    And, again, with Universal having the market power that it
    does, it obviously significantly increases its negotiating
    power with WalMart, with Best Buy, with Target. It will seek
    and will receive, as it has in the past in other circumstances,
    a disproportionate share of promotional opportunities, a
    disproportionate share of those companies' marketing dollars,
    et cetera.
        So it is not that I think a Universal/EMI would fail to
    support a WalMart, a Target, or a Best Buy. It is what happens
    in that support and how WalMart, Best Buy, and Target allocate
    their dollars to the small amount of music sales that they have
    currently. I think that is the issue, and that will result
    either in less sales for Warner and Sony or higher prices for
    consumers, or both.
        Mr. Grainge. Can I just, if you do not mind, Senator?
        Senator Klobuchar. OK.
        Mr. Grainge. That is not the business world I live in. The
    sheer thought that we can have retailers stock something that
    people will not go in and buy and take it off their shelves is
    insanity. So we have to provide music to them, and they will
    only take music that they think that they can sell; otherwise,
    they will sell Pepsi-Cola or they will sell something else, and
    they will move on.
        Mr. Bronfman. But to be clear, I am not suggesting that
    that music will not be on the shelves. All I am saying is one
    has to think about the terms on which it got on those shelves
    and the terms on which other music that also would like to be
    on the shelves has to take as a result.
        Mr. Faxon. But can I say, let us understand, Best Buy and
    Target--music is a very small part of--if you take WalMart,
    Best Buy, and Target, music represents less than 0.3 percent of
    their turnover. If we as an industry or even a significant
    player try to raise prices in a way that is not going to
    benefit--is going to reduce demand and, therefore, reduce
    turnover per square foot, what is going to happen? It is a very
    simple thing. And so they will resist, and we have to supply at
    the terms that they will accept. And we are looking--these
    stores, they look at their square footage and say, ``What is my
    turn? What is my profit retention? '' And if music is not
    providing it, they put something else in. We know that, because
    shelf space has vastly reduced in our industry. And our prices
    in the physical world have declined, and they continue to
    decline even to this day. So I think this is a red herring,
    frankly.
        Mr. Bronfman. If I could just say, I think I agree with
    much of what Roger said. It is just that he did not respond to
    anything that I had said. I did not talk about Universal/EMI
    raising prices. I simply said that in terms of how much
    marketing dollar Target allocates to music, more of that music
    allocation will go to Universal/EMI. In terms of the floor
    space that they allocate to music, more of that floor space
    will go to Universal/EMI. In terms of the merchandising dollars
    that they allocate to music, more of that will go to Universal/
    EMI. I think that is inevitable and absolutely true.
        Senator Klobuchar. OK. Well, thank you very much. I had
    some other questions on digital distribution and other things
    that I understand have been asked, and so thank you and we will
    submit some more questions for the record. I appreciate all of
    you being here and thoughtfully answering these questions.
        Thank you.
        [The questions of Senator Klobuchar appears under questions
    and answers.]
        Chairman Kohl. I just have a brief question and maybe a
    single question from my colleague.
        Mr. Faxon, if EMI is profitable and its prospects are very
    strong, as you said last year, then why should it be sold to
    its top competitor? How is that in the public interest?
        Mr. Faxon. Well, it was not really put to me that way. What
    was put to me was that Citibank felt that it should put the
    business up for sale, and it is Citibank's obligation for its
    shareholders--and the U.S. Government is one of those--to sell
    it at the best possible price. And Universal came forward with
    the best possible price and, therefore, it is the owner.
        Chairman Kohl. Yes, I understand that as a business
    proposition, but in terms of the public interest, which is what
    the FTC is looking at right now, if your business is profitable
    and growing in the public interest--which is not the only
    interest to be considered--why should we sell it to your top
    competitor?
        Mr. Faxon. I do not think--pardon me if this is sort of
    splitting hairs. I do not think it is not in the public
    interest. In other words, the word ``anti'' in ``antitrust''
    implies to me that it is a bad thing for it to happen. I do not
    think it is a bad thing to happen. There are many scenarios
    that I could map out which I think would be good things to
    happen, but none of those are available. And so this is--I do
    not think this transaction is a bad thing.
        Chairman Kohl. How are you going to profit personally in
    the event that this goes through?
        Mr. Faxon. I am going to lose my job.
        Chairman Kohl. In a comfortable manner?
        [Laughter.]
        Mr. Faxon. I hope so.
        Chairman Kohl. All right. Finally--and then Mr. Lee--Mr.
    Bronfman, would it be in the public interest for this deal in
    its current state not to be done with Universal but, rather, to
    be done with Warner?
        Mr. Bronfman. I think it is not in the public interest,
    Senator, for this deal to be done with Universal. I think any
    other deal will receive its own scrutiny, but on the face of
    it, the largest company in the industry becoming this much
    larger is wrong and it is not in the public interest.
        Chairman Kohl. Senator Lee.
        Senator Lee. I just have one more question. This one is for
    Mr. Azoff.
        We have had a lot of discussion today, Mr. Azoff, about
    market power, and I just wanted to give you a chance to sort of
    wrap up on this one. Tell me, in your opinion, will the
    consolidation of Universal with EMI likely bring about a set of
    market conditions that will result in harm to consumer welfare,
    for instance, in giving the new combined merged company the
    power to dictate prices, to determine the fate of new
    distribution channels, or the power to dominate and potentially
    foreclose sequential contracting arrangements?
        Mr. Azoff. I think their power will be virtually the same
    as if the transaction did not go through, and, again, I would
    like to just say we are kind of riding a big wave across the
    business that will have far more impact than this merger
    possibly could.
        Senator Lee. Thank you very much.
        Chairman Kohl. We thank you all for coming. It has been an
    interesting hearing, and I think it has cast a lot of light on
    this deal and on your industry. Your journey has been fruitful,
    and we appreciate your coming.
        Thank you so much.
        [Whereupon, at 4:37 p.m., the Subcommittee was adjourned.]
        [Questions and answers and submissions for the record
    follow.]