The U.K. regulator Competition and Markets Authority has raised concerns around Sony Music’s purchase of Kobalt’s recorded-music services division AWAL, after the first phase of its investigation into the acquisition.
The investigation found that the distribution of recorded music in the U.K. is currently “highly concentrated,” with the three major labels accounting for the majority of the market and the independent sector handling the remainder. However, Sony calls the move “perplexing and based on an incorrect understanding” of AWAL’s role in the U.K. marketplace. Sources note that AWAL only recently became profitable after operating at a loss for 20 years. AWAL’s market share is estimated at 1-2%, according to Music Week.
The $430 million deal, which was completed in February, saw the transfer of Kobalt Music Group’s recorded music operations and left Kobalt Music Group with its music publishing business and global digital collection agency AMRA. While initial concerns were raised about the roles of certain staff members when the investigation was announced, the bigger picture points to the transition of the company from the independent (Kobalt) to the major-label sector (Sony), as well as Sony’s existing label-services division, the Orchard.
Sony has five business days to address the CMA’s concerns, which may be followed by a “Merger Inquiry,” although the timing on that stage was unclear at the time of this article’s publication.
“AWAL is an important emerging player, widely recognized for its innovative business model,” the CMA said. “It is one of the few suppliers outside the major labels that has succeeded in gaining a meaningful foothold in the market and has grown significantly in recent years.” The CMA concluded that Sony and AWAL would have been solid competitors had the deal not gone through, resulting in a benefit to artists.
“AWAL was well-placed to grow its business even further in the coming years,” said the CMA. “There is also evidence that Sony intended to expand The Orchard’s offering, focusing more on the emerging pool of smaller artists, which would have led it to compete more with AWAL. … The loss of an innovative competitor like AWAL could, despite continued presence of the other major labels, lead to worse terms for artists and less innovation in the music sector.”
In a statement, Sony Music Entertainment said: “This decision by the CMA is perplexing and based on an incorrect understanding of AWAL’s position in the UK. We strongly believe this transaction is unambiguously pro-competitive and that our investment in AWAL is key to its continued growth, and future success. Every other regulatory body that has reviewed this transaction has agreed with our view and approved it quickly. We will continue to work closely with the CMA to resolve any questions they might have.”
CMA Senior Director Colin Raftery said: “The music industry forms an important part of the UK’s flourishing entertainment sector, and it’s essential that distributors continue to compete to find new and creative ways of working with artists.
“We’re concerned that this deal could reduce competition in the industry, potentially worsening the deals on the table for many music artists in the UK, and leading to less innovation across the industry.”