[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
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
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.]






                                 
