Back in May, the UK’s Competition and Markets Authority (CMA) began investigating Sony Music Entertainment’s $430 million buyout of Kobalt-owned AWAL. Now, the government agency has outlined a number of “competition concerns” and given the Big Three record label five days to address the potential hang-ups before the investigation enters a new phase.
Sony Music – which has enjoyed double-digit year-over-year revenue growth to this point in 2021 – unveiled its “definitive agreement” to purchase Kobalt’s AWAL in early February, at about the same time that the CMA ordered Viagogo to sell the international portion of StubHub. Besides AWAL, the multimillion-dollar transaction encompasses Kobalt Neighbouring Rights and would see the divisions begin to operate “within SME’s suite of independent artist and label services offerings.”
As a pertinent aside, the CMA, while taking issue with the possible AWAL acquisition, has given the green light to the Kobalt Neighbouring Rights component of the deal. Furthermore, Lonny Olinick, who touted AWAL artists’ streaming income last August, was expected to remain on as AWAL CEO post-purchase, while Kobalt higher-ups signaled that they would work to grow their publishing division and their AMRA collection society once the deal had closed.
But as initially mentioned, the Competition and Markets Authority launched an investigation into the proposed buyout in mid-May.
In announcing the probe, the CMA indicated that it had “reasonable grounds for suspecting that” the purchase, if carried out, could result in the involved Kobalt subsidiaries and Sony Music “ceasing to be distinct.” Additionally, the entity outlined a number of operational requirements for AWAL and SME amid the investigation, and it bears noting that a parliamentary committee in a comprehensive July report called for the CMA “to undertake a full market study into the economic impact of the majors’ dominance.”
Regarding the CMA’s decision to set the stage for the second phase of the inquiry, the eight-year-old agency specified that it had “found evidence that – if the deal had not gone ahead – Sony and AWAL could also have competed more strongly with each other in [the] future,” despite the “limited direct competition between Sony and AWAL to date.”
On this front, the CMA in a summary of its preliminary findings characterized AWAL as “an important emerging supplier in the wholesale digital distribution of recorded music in the UK,” with “internal documents” showing that the company “anticipated that its business would grow significantly over the next few years.” Sony, on the other hand, had “a clear intention to expand The Orchard’s A&L [artist and label] services business” in the absence of an AWAL buyout, according to the CMA.
Building upon the point, the Competition and Markets Authority described as “limited” the competition that Sony Music and AWAL will face from Believe, Downtown, PIAS, “‘ungated’ DIY platforms,” and indie labels. Interestingly, in explaining the perception that competition from independent labels as well as Believe, Downtown, and others will prove “limited,” the CMA relayed that the latter entities “do not receive the same attention as AWAL within Sony’s internal documents” and that the indie labels “are not referenced prominently in the Parties’ internal documents.”
“Accordingly, the CMA believes that the Merger raises significant competition concerns as a result of a loss of potential competition in relation to the wholesale digital distribution of recorded music in the UK,” the document states in closing.
Sony Music officials have five “working days” to “address the CMA’s concerns,” the report also notes, and if they are “unable to do so, the deal will be referred for an in-depth Phase 2 investigation.”
SME addressed the development in a widely circulated statement, communicating: “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,” finished the Big Three record label, which last month filed a copyright infringement lawsuit against Bang Energy.