Sony Music: AWAL would have ‘had a hard time to preserve its position’ if we had not purchased it
In the very first quarter of 2022, the eyes of the international music market will focus, a minimum of for a while, on the UK.
Why? Due to the fact that the nationwide competitors guard dog for the world’s 3rd biggest music market– the UK’s Competition and Markets Authority (CMA)– is hectic examining Sony [1,485 articles]” > Sony Music’s $430 million acquisition of AWAL from Kobalt Music Group [542 articles]” > Kobalt Music Group.
We’re anticipating the CMA’s last judgment on the Sony/ AWAL [213 articles]” > AWAL acquisition by the end of March next year, following ‘Phase Two’ of its probe into the offer.
A lot is riding on this result: For beginners, it’s possible that an unfavorable conclusion from the CMA might require Sony to offer AWAL (in the UK, a minimum of).
This, in turn, might possibly have a ‘freezing result’ on music’s other multi-nationals (Universal Music Group [2,516 articles]” > Universal Music Group in specific) performing massive acquisitions in future, specifically if they include business doing substantial organization in Britain.
Does the CMA truly have the power to stop the momentum of huge worldwide corporations? It sure does: In November, the CMA ruled that Facebook [368 articles]” > Facebook (aka Meta) should offer the animated image database Giphy– a choice that Mark Zuckerberg [28 articles]” > Mark Zuckerberg and co. are now appealing.
The proof presently being thought about by the CMA, for that reason, is essential not just to the Sony/AWAL offer, however likewise for the whole worldwide music market in the years ahead.
On December 22, Sony Music’s comprehensive reaction to the CMA’s ‘problems declaration’– which showed up in October– was released online. (The CMA’s ‘concerns declaration’ is basically a file developed to generate defenses and approvals from celebrations from throughout market.)
MBW has actually now sorted through the whole of Sony’s extremely fascinating file, which brings the following alluring words on each of its 48 pages: CONFIDENTIAL: CONTAINS BUSINESS SECRETS.
Alas, a great piece of Sony’s “tricks” in the file are journalistically blighted by redacted secret information.
There’s still plenty in there for us to get our teeth into.
Summing up its CMA action in a declaration provided to MBW, Sony Music Entertainment [1,098 articles]” > Sony Music Entertainment (SME) stated of its AWAL acquisition: “The music market is extremely competitive and ending up being more so, not less.
” This is a growth-focused mix of 2 complementary services that do not take on each other in any significant method and deal totally various services to really various consumers.
” By allowing severely required financial investment in AWAL, the acquisition will benefit AWAL, helpful for artists and helpful for the UK music market.”
Having pored through Sony’s 48 pages of argument, here MBW provides a summary of the significant music business’s crucial arguments regarding why it thinks its AWAL acquisition need to stand, continuous …
1) AWAL has actually ‘never ever paid’– and would not have actually had the ability to substantially broaden without Sony’s financial investment
It’s not precisely prevalent for a purchasing entity to openly explain the business weak points of a business it’s simply gotten for a nine-figure amount. These are not common scenarios.
Within its CMA reaction file, Sony Music consistently makes the point that AWAL, under Kobalt Music Group, would have struggled to broaden its operation due to the monetary truths of its organization. (This is, obviously, a topic that MBW has actually thoroughly gone into formerly.)
” AWAL has actually never ever paid … [and] it does not have a worldwide footprint.”
Sony Music CMA submission
” AWAL has actually never ever paid … [and] it does not have an international footprint,” the Sony file checks out, additional declaring that “[under] continued ownership by Kobalt, AWAL dealt with an unpredictable future”.
The “worldwide footprint” part there is especially intriguing: When AWAL was offered to Sony Music previously this year, it ran 12 workplaces worldwide; Sony Music itself ran over 40.
Sony’s CMA submission includes: “Based on [the] proof … it is unthinkable that, under Kobalt’s ownership, AWAL might (still less would) have actually broadened into brand-new markets, grown its present share, and/or end up being a more detailed rival of SME in A&R services or The Orchard [179 articles]” > The Orchard in A&L services.”
2) AWAL’s tech and ‘gated’ design is not distinct, regardless of a ‘strong management group’
A big percentage of Sony’s submission to the CMA concentrates on AWAL’s evident absence of business distinction in a congested field of artist services business.
Again, it is possibly unexpected to see the acquirer of AWAL explain the following: “AWAL is not special. AWAL is not remarkable: it does not use any service or proposal that other artist service business do not likewise offer … There Is Nothing Distinctive About AWAL.”
Yet Sony’s program here is clear: The CMA has actually formerly raised issues that “AWAL’s design is viewed as disruptive” in the music service; under this reasoning, Sony purchasing AWAL would lead to a “disruptor” to the significant record business being offed by among the Big Three.
Sony’s CMA submission clearly refutes this concept on 2 counts: That both AWAL’s innovation, which the company’s ‘gated’ or ‘filtered’ design of A&R (which sees just a little percentage of artists who send music picked as AWAL customers) are not distinct.
” AWAL is not distinct. AWAL is not remarkable: it does not use any service or proposal that other artist service business do not likewise offer … There Is Nothing Distinctive About AWAL.”
Sony Music CMA submission
In its very first couple of pages, Sony’s file mentions that AWAL “takes on many suppliers of artist services and DIY services, consisting of Believe [205 articles]” > Believe, Ditto Music [52 articles]” > Ditto, DistroKid [40 articles]” > DistroKid, Downtown Music Holdings [245 articles]” > Downtown, and UnitedMasters”.
Sony’s submission later on likewise keeps in mind that AWAL likewise provides “similar services” (e.g. DIY circulation, plus a fuller suite of artist services) to business such as Amuse [32 articles]” > Amuse, Believe, OneRPM [6 articles]” > OneRPM, SoundCloud [355 articles]” > SoundCloud, Universal and Warner.
It continues: “Although [AWAL] was amongst the very first business to offer artist and DIY services to mid-tier and emerging artists, its services have actually been duplicated by lots of others.”
Adds the file: “AWAL does not have distinct or extraordinary innovation, IP, or properties. Its ‘gated’ DIY service is not special: other platforms have comparable filtering systems, which are technically simple to carry out.”
” AWAL is among numerous artist and DIY companies. In the 20 years considering that its launch, it has actually established a brand, drew in artists, and has a strong management group. It is not, nevertheless, remarkable … and contends in a congested field.”
Sony Music CMA submission
Sony notes that in past CMA cases, an important aspect has actually been when an obtained celebration is establishing/ has actually established an innovation that might shock the power dynamic of an extremely focused market.
It indicates a current case including the acquisition by Sabre Holdings Corporation of Farelogix Inc., in which the latter company had actually established exclusive ticketing innovation with the prospective to change the travel organization.
Sony argues that, when it pertains to AWAL, “No such realities exist”.
It includes: “AWAL is among lots of artist and DIY companies. In the 20 years because its launch, it has actually established a brand, brought in artists, and has a strong management group.
” It is not, nevertheless, remarkable … and completes in a congested field … Notwithstanding its preliminary success and development (from a really low base), any “very first mover benefit” was brief … Others have actually reproduced and enhanced on AWAL’s offering utilizing easily offered tools.”
3) AWAL’s market share isn’t big enough to materially alter market characteristics. Sony Music has “no market power” (vs. Universal, anyhow)
Sony makes an eager argument in its submission to the CMA about market share, on 2 counts:
- ( i) As the 2nd most significant taped music business, Sony Music feels it does not have enough market weight in the UK or internationally to enact excessive supremacy on the market; and
- ( ii) That AWAL’s market share of both the UK and worldwide taped music market is far too little to make a product effect as a gotten Sony entity.
Sony even declares that it has (quote) “no market power” in the UK, keeping in mind that its market share in the area has actually fallen given that 2017.
( Sony edits the important information for this claim in the general public variation of its file, however does keep in mind that it “tracks Universal” in market share, which it likewise deals with a “growing neighborhood of independent labels and company, whose cumulative share in the UK has actually increased given that 2017”.)
Sony in fact does put a number on one crucial piece of information, keeping in mind that Sony’s labels, plus The Orchard, plus AWAL “together represented just 20-25% of 2020 digital sales of documented music in the UK”.
In no unpredictable terms, Sony argues: “It is implausible that the [AWAL buyout] might provide market power offered AWAL’s little share.”
” Even after AWAL’s re-launch in 2017/18, it is still a little gamer and deals with competitors from a wide range of other A&L and DIY service providers.”
Continues the Sony submission: “[AWAL’s] DIY circulation clients– at c. 14,000– are overshadowed by those of DistroKid (2 million), CD Baby [87 articles]” > CD Baby (1 million) or TuneCore [139 articles]” > TuneCore (250,000). Its earnings are much smaller sized than those of Believe, for instance, which produced c. $700 million worldwide in 2019 and has about 1,300 staff members worldwide.
” Even after AWAL’s re-launch in 2017/18, it is still a little gamer and deals with competitors from a wide variety of other A&L and DIY companies, consisting of Believe, BMG [723 articles]” > BMG, CD Baby, DistroKid, Ditto, [PIAS] [141 articles]” > PIAS, and Tunecore.”
4) Sony does not believe the AWAL purchase will enhance its bargaining power vs. tech giants … although the indies disagree
Sony isn’t the only music market entity to have actually published a main action to the CMA’s ‘problems declaration’.
IMPALA, which represents independent labels and suppliers throughout Europe, argued in a CMA file submitted in November that “whilst Sony’s market share gain might appear little in taped music, it makes up a considerable loss in the independent music sector’s scale and capability to work out digital licensing offers through Merlin [227 articles]” > Merlin”.
IMPALA [76 articles]” > IMPALA’s gripe here is clear: The cumulative bargaining power of Merlin– which itself represents a number of IMPALA’s members– has actually been deteriorated by the exit from its ranks of AWAL to Sony.
” the addition of AWAL will plainly enhance Sony in regards to market share, and, as Sony currently has a high market share, it will have the ability to take advantage of the extra market share in a manner in which a smaller sized record business would not have the ability to do.”
IMPALA CMA submission
IMPALA argues that Sony’s own working out power with DSPs– such as Spotify [2,655 articles]” > Spotify and Apple [894 articles]” > Apple– will be unjustly increased by the addition of AWAL. It composes: “[The] addition of AWAL will plainly enhance Sony in regards to market share, and, as Sony currently has a high market share, it will have the ability to utilize the extra market share in a manner in which a smaller sized record business would not have the ability to do.”
” It is implausible that SME’s acquisition of AWAL, and the extra increment in its international share that it would thus acquire, might have any material result on settlements with DSPs.”
Sony Music CMA submission
Sony’s action to this line of argument is basic: In essence, the addition of AWAL– with its circa $150 million yearly turnover– is however a speck of dust to tech goliaths like Apple, Amazon [553 articles]” > Amazon and co, who run big music streaming services and deserve trillions of dollars.
Sony’s submission checks out: “The theory of damage appears to be that the mix of SME’s and AWAL’s brochures might provide the merged entity higher bargaining power vis-à-vis DPSs that enables it to work out supply terms that are less beneficial to DSPs. This theory is not supported by the realities.
” The DSPs– tech titans like Spotify, Apple, Amazon and Google [654 articles]” > Google– are inescapable trading partners that work out significant bargaining power. SME’s terms have for a number of years degraded in their favour.
” It is for that reason implausible that SME’s acquisition of AWAL, and the extra increment in its worldwide share that it would thus get, might have any material result on settlements with DSPs.”
5) AWAL and Sony’s labels serve extremely various kinds of artists
Another point Sony makes extremely highly is that its frontline labels (consisting of the similarity Columbia, Epic Records [209 articles]” > Epic and RCA) have actually hardly taken on AWAL in the past to sign brand-new artists.
Reads Sony’s submission: “AWAL does not draw in (or maintain) the very same profile of artists as SME’s frontline labels, and is not placed to do so in the future. AWAL’s company is tailored towards maintenance artists that do not need– or always desire– the very same level of service as SME’s frontline artists.”
” AWAL is a substantial rival when it concerns A&R, taking on the significant record business.”
IMPALA CMA submission
This line of argument remains in direct contrast to a recommendation made by IMPALA in its CMA submission: “AWAL is a considerable rival when it pertains to A&R, taking on the significant record business, Sony, Universal and Warner, in addition to other independent music business.”
Sony rebuts this thusly: “Sony Music Entertainment (SME) has actually determined no artist who has actually moved from SME to AWAL, and just one artist who was just recently courted by SME however chose to sign with AWAL.
” In action to the [CMA’s] demand to list AWAL’s closest options, AWAL’s clients did not determine SME’s frontline labels as one of their leading 3 rivals.”
” Sony Music has actually determined no artist who has actually moved from [Sony] to AWAL, and just one artist who was just recently courted by [Sony] however chose to sign with AWAL.”
Sony Music CMA submission
Sony summarize the distinction in between the type of artists looked for by its frontline labels, and the sort of artists looked for by AWAL, with the following table:
6) AWAL and Sony’s The Orchard likewise serve various kinds of artists– and SME’s financial investment in The Orchard reveals the development that might lie ahead for AWAL
It’s not simply frontline labels that Sony Music is eager to separate from AWAL: The significant record business consistently makes the point that “The Orchard Focuses On Labels, While AWAL Focuses On Artists”.
Sony mentions findings from Ender Analysis that discusses: “The Orchard and AWAL do not contend for customers” which “the scope of services offered by The Orchard to labels stands out from those supplied by AWAL to its artists”.
Sony likewise points out “changing information”– i.e. circumstances of when artist/label customers have actually leapt from one business to among its competitors.
Says the submission: “While there has actually been absolutely no changing in between The Orchard and AWAL, the changing information reveal that there is changing in between The Orchard and other business, consisting of Believe, OneRPM, PIAS, INgrooves, ADA, and Fuga. Those business, not AWAL, represent The Orchard’s close rivals.”
” there has actually been no changing [of artists/labels] in between The Orchard and AWAL.”
Sony CMA submission
Interestingly, Sony keeps in mind that it was “not preparing to broaden The Orchard as a competitive action to AWAL”– simply put, that it wasn’t on Sony Music’s program to introduce a DIY artist-upload service.
Both of Sony’s closest competitors– Universal Music Group and Warner Music Group [1,908 articles]” > Warner Music Group– have done this in the past, with Spinnup and Level Music, respectively.
As for the future of AWAL, Sony indicates the truth that it’s significantly increased the worldwide existence of The Orchard because it totally obtained that company, which a comparable development strategy has actually been defined for AWAL.
” SME prepares to broaden AWAL’s services and geographical footprint.”
Sony CMA submission
” SME prepares to broaden AWAL’s services and geographical footprint,” checks out the file, including: “This growth will increase AWAL artists’ following and potential customers in crucial development markets (consisting of in South America and Asia).”
7) Sony wasn’t ‘required’ into enhancing artist terms by AWAL or anybody else
You might remember that Sony Music has actually made 2 statements over the last few years that have actually taken the music market by surprise, while thrilling the broader artist neighborhood.
The very first occurred in 2018, when Sony paid its artists a percentage of the $768 million it had actually just recently moneyed in from its Spotify shares.
Sony overlooked unrecouped balances for artists when making this relocation, suggesting that a far higher portion of the cash paid– verified in the CMA file at ≈$250 million– landed in artist pockets, instead of sticking with the significant.
The 2nd huge statement came previously this year, when Sony Music leader Rob Stringer [150 articles]” > Rob Stringer (envisioned) revealed that his business was to ignore unrecouped balances for future streaming earnings for countless heritage/catalog artists signed to Sony Music.
In its CMA submission, Sony acknowledges that its choice to reward artists in both these circumstances remained in line with a “shift in general market characteristics”, as the pendulum these days’s working out power significantly swings far from labels, and towards skill.
” Sony Music deals with extreme pressure from artists to enhance offer terms … artist expenses represent an ever-increasing share of SME’s profits, in line with SME’s dealing with increasing competitors for artists.”
Sony Music CMA submission
Sony includes its CMA submission that it “deals with extreme pressure from artists to enhance offer terms”, and, as such, “artist expenses represent an ever-increasing share of SME’s incomes, in line with SME’s dealing with increasing competitors for artists”.
It includes: “Due to technological advances, artists have more choices to go to market, they have the ability to tape-record music themselves, develop their own following (e.g., by publishing music to social networks or straight to DSPs), and track their efficiency. As an outcome, artists are requiring greater settlement and more control over their music.”
However, Sony is extremely clear in its argument that its current relocate to enhance the earnings of its artists (especially those signed to The Orchard) have actually been “a number of years in the making and showed long term shifts in market characteristics, not [as] a reaction to AWAL”.
This is an essential argument from Sony, as it challenges a crucial assertion made in the CMA’s ‘Phase One’ examination: that the development in Sony’s offer terms with artists has actually been a direct reaction to AWAL’s presence and development.
8) Sony paid a quite cent for AWAL– however this was really under normal market price
Even in this age of widespread brochure acquisitions, significant record business just do not pay the very best part of a half a billion dollars for something really routinely.
So the $430 million Sony Music spent for AWAL (plus Kobalt Neighbouring Rights) this year took a couple of individuals in the music market by surprise.
Sony, nevertheless, states it got a deal. A minimum of, compared to other market activity among AWAL’s competitors.
Sony’s submission checks out: “AWAL’s evaluation was listed below current indicated evaluations of other A&L services and DIY services, consisting of UnitedMasters, DistroKid, and Believe.”
” AWAL’s appraisal was listed below current suggested evaluations of other A&L organizations and DIY services, consisting of UnitedMasters, DistroKid, and Believe.”
Sony Music CMA submission
It’s proper: UnitedMasters was just recently valued at $550 million following financial investment from the similarity Andreessen Horowitz; DistroKid just recently protected a huge $1.3 billion evaluation following financial investment from Insight Partners; and Believe is presently resting on a EUR1.6 billion ($ 1.8 bn) market cap having actually drifted on the Paris Euronext this summer season.
Sony argues that this proof opposes another previous CMA recommendation, that the “worth of … ungated DIY platforms seems materially lower than the rate that Sony has actually paid … to get AWAL”
Sony later on includes that it eventually acquired AWAL for the amount it did due to the fact that AWAL used “complementary services to SME/The Orchard, has a recognized brand name and strong management group, and, notably, since it was offered for purchase at a sensible rate”.
Summing up its arguments to the CMA, Sony Music composes: “The Parties [Sony Music, The Orchard and AWAL] do not contend to any product level, and would not have actually contended more carefully missing the Transaction.
” The Parties deal with competitors from lots of reputable and well-capitalized competitors, consisting of Universal and Warner, which both provide the complete suite of A&L and DIY services. AWAL is among a great deal of existing artist and DIY companies and required financial investment in order to keep, not to mention grow, its position.”
Sony concludes that in the “counterfactual” circumstance– ongoing ownership by Kobalt– “AWAL would have struggled to keep its position and had no reasonable possibility of ending up being a more considerable rival in the foreseeable future”.
You can check out Sony Music Entertainment (SME)’s complete submission to the CMA through this link Music Business Worldwide