In the first quarter of 2022, the eyes of the global music industry will fixate, at least for a while, on the UK.
Why? Because the national competition watchdog for the world’s third largest music market – the UK’s Competition and Markets Authority (CMA) – is busy investigating Sony Music’s $430 million acquisition of AWAL from Kobalt Music Group.
We’re expecting the CMA’s final ruling on the Sony/AWAL acquisition by the end of March next year, following ‘Phase Two’ of its probe into the deal.
A lot is riding on this outcome: For starters, it’s plausible that a negative conclusion from the CMA could force Sony to sell AWAL (in the UK, at least).
This, in turn, could potentially have a ‘freezing effect’ on music’s other multi-nationals (Universal Music Group in particular) executing large-scale acquisitions in future, especially if they involve companies doing significant business in Britain.
Does the CMA really have the power to halt the momentum of giant global corporations? It sure does: In November, the CMA ruled that Facebook (aka Meta) must sell the animated image database Giphy – a decision that Mark Zuckerberg and co. are now appealing.
The evidence currently being considered by the CMA, therefore, is crucial not only to the Sony/AWAL deal, but also for the entire global music market in the years ahead.
On December 22, Sony Music’s extensive response to the CMA’s ‘issues statement’ – which arrived in October – was published online. (The CMA’s ‘issues statement’ is essentially a document designed to elicit rebuttals and approvals from parties from across industry.)
MBW has now sifted through the entirety of Sony’s highly interesting document, which carries the following tantalizing words on each of its 48 pages: CONFIDENTIAL: CONTAINS BUSINESS SECRETS.
Alas, a good chunk of Sony’s “secrets” in the document are journalistically blighted by redacted confidential information.
There’s still plenty in there for us to get our teeth into, though.
Summing up its CMA response in a statement issued to MBW, Sony Music Entertainment (SME) said of its AWAL acquisition: “The music industry is intensely competitive and becoming more so, not less.
“This is a growth-focused combination of two complementary businesses that do not compete with each other in any meaningful way and offer entirely different services to very different customers.
“By enabling badly needed investment in AWAL, the acquisition will be good for AWAL, good for artists and good for the UK music industry.”
Having pored through Sony’s 48 pages of argument, here MBW presents a summary of the major music company’s key arguments as to why it believes its AWAL acquisition should stand, uninterrupted…
1) AWAL has ‘never been profitable’ – and wouldn’t have been able to significantly expand without Sony’s investment
It’s not exactly commonplace for a buying entity to publicly point out the commercial weaknesses of a company it’s just acquired for a nine-figure sum. But these are not typical circumstances.
Within its CMA response document, Sony Music repeatedly makes the point that AWAL, under Kobalt Music Group, would have struggled to expand its operation due to the financial realities of its business. (This is, of course, a subject that MBW has extensively dug into previously.)
“AWAL has never been profitable… [and] it lacks a global footprint.”
Sony Music CMA submission
“AWAL has never been profitable… [and] it lacks a global footprint,” the Sony document reads, further claiming that “[under] continued ownership by Kobalt, AWAL faced an uncertain future”.
The “global footprint” part there is particularly interesting: When AWAL was sold to Sony Music earlier this year, it operated 12 offices worldwide; Sony Music itself operated over 40.
Sony’s CMA submission adds: “Based on [the] evidence… it is inconceivable that, under Kobalt’s ownership, AWAL could (still less would) have expanded into new markets, grown its current share, and/or become a closer competitor of SME in A&R services or The Orchard in A&L services.”
2) AWAL’s tech and ‘gated’ model is not unique, despite a ‘strong leadership team’
A large proportion of Sony’s submission to the CMA focuses on AWAL’s apparent lack of commercial differentiation in a crowded field of artist services companies.
Again, it is perhaps surprising to see the acquirer of AWAL point out the following: “AWAL is not unique. AWAL is not exceptional: it does not offer any service or proposition that other artist service companies do not also provide… There Is Nothing Distinctive About AWAL.”
Yet Sony’s agenda here is clear: The CMA has previously raised concerns that “AWAL’s model is seen as disruptive” in the music business; under this logic, Sony buying AWAL would result in a “disruptor” to the major record companies being snuffed out by one of the Big Three.
Sony’s CMA submission explicitly argues against this notion on two counts: That both AWAL’s technology, and that the firm’s ‘gated’ or ‘filtered’ model of A&R (which sees only a small proportion of artists who submit music chosen as AWAL clients) are not unique.
“AWAL is not unique. AWAL is not exceptional: it does not offer any service or proposition that other artist service companies do not also provide… There Is Nothing Distinctive About AWAL.”
Sony Music CMA submission
In its first few pages, Sony’s document points out that AWAL “competes with numerous providers of artist services and DIY services, including Believe, Ditto, DistroKid, Downtown, and UnitedMasters”.
Sony’s submission later also notes that AWAL also offers “comparable services” (e.g. DIY distribution, plus a fuller suite of artist services) to companies such as Amuse, Believe, OneRPM, SoundCloud, Universal and Warner.
It continues: “Although [AWAL] was among the first companies to provide artist and DIY services to mid-tier and emerging artists, its services have been replicated by dozens of others.”
Adds the document: “AWAL does not have unique or exceptional technology, IP, or assets. Likewise, its ‘gated’ DIY service is not unique: other platforms have similar filtering mechanisms, which are technically straightforward to implement.”
“AWAL is one of many artist and DIY services providers. In the 20 years since its launch, it has developed a brand name, attracted artists, and has a strong leadership team. It is not, however, exceptional… and competes in a crowded field.”
Sony Music CMA submission
Sony notes that in past CMA cases, a crucial factor has been when an acquired party is developing / has developed a technology that could shake up the power dynamic of a highly concentrated industry.
It points to a recent case involving the acquisition by Sabre Holdings Corporation of Farelogix Inc., in which the latter firm had developed proprietary ticketing technology with the potential to transform the travel business.
Sony argues that, when it comes to AWAL, “No such facts exist”.
It adds: “AWAL is one of many artist and DIY services providers. In the 20 years since its launch, it has developed a brand name, attracted artists, and has a strong leadership team.
“It is not, however, exceptional… and competes in a crowded field… Notwithstanding its initial success and growth (from a very low base), any “first mover advantage” was short-lived… Others have replicated and improved on AWAL’s offering using readily available tools.”
3) AWAL’s market share isn’t large enough to materially change market dynamics. Also, Sony Music has “no market power” (vs. Universal, anyway)
Sony makes a keen argument in its submission to the CMA about market share, on two counts:
- (i) As the second biggest recorded music company, Sony Music feels it doesn’t have sufficient market weight in the UK or globally to enact undue dominance on the marketplace; and
- (ii) That AWAL’s market share of both the UK and global recorded music market is far too small to make a material impact as an acquired Sony entity.
Sony even claims that it has (quote) “no market power” in the UK, noting that its market share in the territory has fallen since 2017.
(Sony redacts the crucial data for this claim in the public version of its document, but does note that it “trails Universal” in market share, and that it also faces a “growing community of independent labels and service providers, whose collective share in the UK has increased since 2017”.)
Sony actually does put a number on one key piece of data, noting that Sony’s labels, plus The Orchard, plus AWAL “together accounted for only 20-25% of 2020 digital sales of recorded music in the UK”.
In no uncertain terms, Sony argues: “It is implausible that the [AWAL buyout] could confer market power given AWAL’s small share.”
“Even after AWAL’s re-launch in 2017/18, it is still a small player and faces competition from a multitude of other A&L and DIY providers.”
Continues the Sony submission: “[AWAL’s] DIY distribution customers – at c. 14,000 – are dwarfed by those of DistroKid (2 million), CD Baby (1 million) or TuneCore (250,000). Its revenues are much smaller than those of Believe, for example, which generated c. $700 million globally in 2019 and has about 1,300 employees globally.
“Even after AWAL’s re-launch in 2017/18, it is still a small player and faces competition from a multitude of other A&L and DIY providers, including Believe, BMG, CD Baby, DistroKid, Ditto, PIAS, and Tunecore.”
4) Sony doesn’t think the AWAL buy will improve its bargaining power vs. tech giants… even though the indies disagree
Sony isn’t the only music industry entity to have posted an official response to the CMA’s ‘issues statement’.
IMPALA, which represents independent labels and distributors across Europe, argued in a CMA document filed in November that “whilst Sony’s market share gain may seem small in recorded music, it constitutes a significant loss in the independent music sector’s scale and ability to negotiate digital licensing deals through Merlin“.
IMPALA‘s gripe here is clear: The collective bargaining power of Merlin – which itself represents many of IMPALA’s members – has been weakened by the exit from its ranks of AWAL to Sony.
“the addition of AWAL will clearly strengthen Sony in terms of market share, and, as Sony already has a high market share, it will be able to leverage the additional market share in a way that a smaller record company would not be able to do.”
IMPALA CMA submission
IMPALA argues that Sony’s own negotiating power with DSPs – such as Spotify and Apple – will be unfairly boosted by the addition of AWAL. It writes: “[The] addition of AWAL will clearly strengthen Sony in terms of market share, and, as Sony already has a high market share, it will be able to leverage the additional market share in a way that a smaller record company would not be able to do.”
“It is implausible that SME’s acquisition of AWAL, and the additional increment in its global share that it would thereby obtain, could have any material effect on negotiations with DSPs.”
Sony Music CMA submission
Sony’s response to this line of argument is simple: In essence, the addition of AWAL – with its circa $150 million annual turnover – is but a speck of dust to tech goliaths like Apple, Amazon and co, who run large music streaming services and are worth trillions of dollars.
Sony’s submission reads: “The theory of harm seems to be that the combination of SME’s and AWAL’s catalogues may give the merged entity greater bargaining power vis-à-vis DPSs that allows it to negotiate supply terms that are less favourable to DSPs. This theory is not supported by the facts.
“The DSPs – tech titans like Spotify, Apple, Amazon and Google – are unavoidable trading partners that exercise considerable bargaining power. SME’s terms have for several years deteriorated in their favour.
“It is therefore implausible that SME’s acquisition of AWAL, and the additional increment in its global share that it would thereby obtain, could have any material effect on negotiations with DSPs.”
5) AWAL and Sony’s labels serve very different types of artists
Another point Sony makes very strongly is that its frontline labels (including the likes of Columbia, Epic and RCA) have barely competed with AWAL in the past to sign new artists.
Reads Sony’s submission: “AWAL does not attract (or retain) the same profile of artists as SME’s frontline labels, and is not positioned to do so in the future. AWAL’s business is geared towards servicing artists that do not require – or necessarily want – the same level of service as SME’s frontline artists.”
“AWAL is a significant competitor when it comes to A&R, competing with the major record companies.”
IMPALA CMA submission
This line of argument is in direct contrast to a suggestion made by IMPALA in its CMA submission: “AWAL is a significant competitor when it comes to A&R, competing with the major record companies, Sony, Universal and Warner, as well as other independent music companies.”
Sony rebuts this thusly: “Sony Music Entertainment (SME) has identified no artist who has moved from SME to AWAL, and only one artist who was recently courted by SME but decided to sign with AWAL.
“In response to the [CMA’s] request to list AWAL’s closest alternatives, AWAL’s customers did not identify SME’s frontline labels as one of their top three competitors.”
“Sony Music has identified no artist who has moved from [Sony] to AWAL, and only one artist who was recently courted by [Sony] but decided to sign with AWAL.”
Sony Music CMA submission
Sony sums up the difference between the kind of artists sought by its frontline labels, and the kind of artists sought by AWAL, with the following table:
6) AWAL and Sony’s The Orchard also serve different types of artists – and SME’s investment in The Orchard shows the growth that may lie ahead for AWAL
It’s not just frontline labels that Sony Music is keen to differentiate from AWAL: The major record company repeatedly makes the point that “The Orchard Focuses On Labels, While AWAL Focuses On Artists”.
Sony cites findings from Ender Analysis that explains: “The Orchard and AWAL do not compete for clients” and that “the scope of services provided by The Orchard to labels is distinct from those provided by AWAL to its artists”.
Sony also cites “switching data” – i.e. instances of when artist/label clients have jumped from one company to one of its rivals.
Says the submission: “While there has been zero switching between The Orchard and AWAL, the switching data show that there is switching between The Orchard and other companies, including Believe, OneRPM, PIAS, INgrooves, ADA, and Fuga. Those companies, not AWAL, represent The Orchard’s close competitors.”
“there has been zero switching [of artists/labels] between The Orchard and AWAL.”
Sony CMA submission
Interestingly, Sony notes that it was “not planning to expand The Orchard as a competitive response to AWAL” – in other words, that it wasn’t on Sony Music’s agenda to launch a DIY artist-upload service.
Both of Sony’s closest rivals – Universal Music Group and Warner Music Group – have done this in the past, with Spinnup and Level Music, respectively.
As for the future of AWAL, Sony points to the fact that it’s greatly increased the global presence of The Orchard since it fully acquired that business, and that a similar growth plan has been marked out for AWAL.
“SME plans to expand AWAL’s services and geographic footprint.”
Sony CMA submission
“SME plans to expand AWAL’s services and geographic footprint,” reads the document, adding: “This expansion will increase AWAL artists’ following and prospects in important growth markets (including in South America and Asia).”
7) Sony wasn’t ‘forced’ into improving artist terms by AWAL or anyone else
You may recall that Sony Music has made two announcements in recent years that have taken the music industry by surprise, while delighting the wider artist community.
The first happened in 2018, when Sony paid its artists a proportion of the $768 million it had recently cashed in from its Spotify shares.
Sony ignored unrecouped balances for artists when making this move, meaning that a far greater chunk of the money paid out – confirmed in the CMA document at ≈$250 million – landed in artist pockets, rather than staying with the major.
The second big announcement came earlier this year, when Sony Music leader Rob Stringer (pictured) announced that his company was to disregard unrecouped balances for future streaming income for thousands of heritage/catalog artists signed to Sony Music.
In its CMA submission, Sony acknowledges that its decision to reward artists in both these instances was in line with a “shift in overall industry dynamics”, as the pendulum of today’s negotiating power increasingly swings away from labels, and towards talent.
“Sony Music faces intense pressure from artists to improve deal terms… artist costs represent an ever-increasing share of SME’s revenues, in line with SME’s facing increasing competition for artists.”
Sony Music CMA submission
Sony adds in its CMA submission that it “faces intense pressure from artists to improve deal terms”, and, as such, “artist costs represent an ever-increasing share of SME’s revenues, in line with SME’s facing increasing competition for artists”.
It adds: “Due to technological advances, artists have more options to go to market, they are able to record music themselves, establish their own following (e.g., by uploading music to social media or directly to DSPs), and track their performance. As a result, artists are demanding higher compensation and more control over their music.”
However, Sony is very clear in its argument that its recent moves to improve the income of its artists (particularly those signed to The Orchard) have been “several years in the making and reflected long term shifts in industry dynamics, not [as] a response to AWAL”.
This is an important argument from Sony, as it challenges a key assertion made in the CMA’s ‘Phase One’ investigation: that the evolution in Sony’s deal terms with artists has been a direct response to AWAL’s existence and growth.
8) Sony paid a pretty penny for AWAL – but this was actually under typical market value
Even in this age of rampant catalog acquisitions, major record companies simply don’t pay the best part of a half a billion dollars for something very regularly.
So the $430 million Sony Music paid for AWAL (plus Kobalt Neighbouring Rights) this year took a few people in the music industry by surprise.
Sony, however, says it got a bargain. At least, compared to other market activity amongst AWAL’s rivals.
Sony’s submission reads: “AWAL’s valuation was below recent implied valuations of other A&L businesses and DIY services, including UnitedMasters, DistroKid, and Believe.”
“AWAL’s valuation was below recent implied valuations of other A&L businesses and DIY services, including UnitedMasters, DistroKid, and Believe.”
Sony Music CMA submission
It’s correct: UnitedMasters was recently valued at $550 million following investment from the likes of Andreessen Horowitz; DistroKid recently secured a massive $1.3 billion valuation following investment from Insight Partners; and Believe is currently sitting on a €1.6 billion ($1.8bn) market cap having floated on the Paris Euronext this summer.
Sony argues that this evidence contradicts another previous CMA suggestion, that the “value of… ungated DIY platforms appears to be materially lower than the price that Sony has paid… to acquire AWAL”
Sony later adds that it ultimately purchased AWAL for the sum it did because AWAL offered “complementary services to SME/The Orchard, has a known brand and strong leadership team, and, importantly, because it was available for purchase at a reasonable price”.
Summing up its arguments to the CMA, Sony Music writes: “The Parties [Sony Music, The Orchard and AWAL] do not compete to any material extent, and would not have competed more closely absent the Transaction.
“The Parties face competition from dozens of credible and well-capitalized rivals, including Universal and Warner, which both offer the full suite of A&L and DIY services. AWAL is one of a large number of existing artist and DIY services providers and needed investment in order to maintain, let alone grow, its position.”
Sony concludes that in the “counterfactual” scenario – continued ownership by Kobalt – “AWAL would have struggled to maintain its position and had no realistic prospect of becoming a more significant competitor in the foreseeable future”.
You can read Sony Music Entertainment (SME)’s full submission to the CMA through this link.Music Business Worldwide