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UK competition regulator provisionally clears Sony’s acquisition of AWAL

By Chris Cooke | Published on Monday 14 February 2022

The UK’s Competition & Markets Authority provisionally cleared Sony Music’s acquisition of AWAL on Friday having concluded that the deal “does not substantially reduce competition” in the UK music industry “and may not be expected to do so in the future”.

Sony announced it was buying the recordings division of Kobalt – consisting of the AWAL label services set-up and a neighbouring rights agency – just over a year ago in a deal worth around $430 million. For Kobalt, the sale was part of its decision to refocus all energies on its original song rights administration activities, while for Sony it was the latest in a long series of acquisitions to boost the label services side of its business.

All of the majors have grown their distribution and label services operations over the years, of course, but none more so that Sony, mainly via its The Orchard company. Though, while in theory The Orchard and AWAL compete, the former primarily provides services to independent labels, while AWAL primarily provides services to artists running their own single-artist labels.

With that in mind Sony acquiring AWAL did kind of make sense. Although the majors expanding ever more into label services does raise various concerns elsewhere in the industry, given it further increases the market share of the big three and means the majors basically have a certain amount of control over a slice of the independent sector.

And both of those things mean that the majors have more power when negotiating deals with the streaming services and access to ever more usage data to inform marketing activity and business development. Plus such services operations can also provide a funnel via which a major can hook in an artist who might subsequently sign to one of its more conventional labels.

Given those concerns, it wasn’t too surprising when the UK competition regulator announced it was launching a phase one investigation into the deal in May, setting out to assess whether this latest consolation in the music distribution and label services sector raised any competition law issues.

That investigation meant that, although Sony’s AWAL acquisition had been completed, the two businesses couldn’t properly integrate. And that delay in integration extended when, in September, the CMA said that it had identified a sufficient number of concerns regarding the Sony/AWAL deal to instigate a more detailed phase two investigation into the transaction.

At the time 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”.

For its part, Sony said that the decision to instigate a phase two investigation was “perplexing” and “based on an incorrect understanding of AWAL’s position in the UK”. It added: “We strongly believe this transaction is unambiguously pro-competitive and that our investment in AWAL is key to its continued growth and future success”. And the good news – for Sony at least – is that, after doing some more detailed investigating, the CMA now seems to more or less agree.

In a statement on Friday, the CMA said that its inquiry into this deal had focussed on two ways in which the Orchard and AWAL businesses overlap: “It assessed the extent to which The Orchard and AWAL may be expected to compete to provide artist and label services. It also looked at how closely Sony and AWAL may be expected to compete to sign successful artists, and those with the potential to become successful, where higher levels of support and investment are provided”.

The CMA added that it found that “while not currently competing closely due to their different areas of focus, The Orchard may have become a stronger rival to AWAL in the supply of artist services in the future”. But, “there are many other providers who will continue to compete effectively with both firms – including independent artist and label services companies, the artist and label services branches of the other major labels (like Warner Music’s ADA and Universal Music’s Virgin) and independent labels”.

In fact, the regulator mused, “in the course of its investigation, the CMA also found that many other firms have begun providing similar services which can be expected to make up for the limited loss of competition from AWAL”.

In terms of its rivalry with Sony Music at large, the CMA went on, “AWAL is still a relatively small player when it comes to signing artists who require higher levels of support and investment. Despite trying to expand its offering, AWAL was expected to continue to compete with Sony only on a limited basis”.

With all that in mind, the CMA’s provisional finding is that Sony’s purchase of AWAL is all fine and lovely. “Our provisional finding is that the deal is not likely to affect competition in a way that will reduce the choice or quality of recorded music available, or increase prices”, said Margot Daly, Chair of the independent CMA Inquiry Group on Friday afternoon.

“We think that a combination of other major labels and independent providers will continue to closely rival Sony, so our provisional decision is to clear the merger”, she added. The decision is provisional because interested parties now have one last chance to input on the AWAL deal and respond to the CMA’s initial decision. The regulator will then announce its final conclusion by 17 Mar.

“Sony Music Entertainment welcomes the CMA’s provisional determination that its acquisition of AWAL raises no competition concerns and, in doing so, its recognition of the competitive and dynamic nature of the UK music market”, said a spokesperson for Sony Music.

“Our investment in AWAL will deliver real benefits for artists and consumers, amidst intense competition at every level of the music industry”, they went on. “We look forward to continuing to work with the CMA throughout the final stages of their review”.

All that talk in Sony’s statement of “the competitive and dynamic nature of the UK music market” and “intense competition at every level of the music industry” is possibly there as much to influence another CMA study as it is to respond to this one.

Because the CMA’s decision on Sony’s AWAL deal comes as the regulator gets going with its market study into the streaming music business, which was announced in response to the UK Parliament’s inquiry focused on the economics of streaming last year.

That CMA study will look at the digital music supply chain and – among other things – the impact the dominance of the majors in both recordings and music publishing has on the way streaming services license music and the way digital income is shared out between stakeholders within the music community.

All three majors will be keen to stress in that market study just how competitive the music industry is today, with artists having a multitude of options when it comes to picking business partners to work with on their recordings and music rights.

But others in the music sector will counter that the dominance of the majors – and things like the big three’s hold over the old music catalogues and the lack of transparency in the way streaming works – means there are legitimate competition issues in the digital music sector, impacting on artist and songwriters, and entrepreneurs trying to launch and grow independent music businesses.

Responding to the CMA’s provisional ruling on the AWAL deal, Paul Pacifico – boss of the UK’s Association Of Independent Music – said: “Whilst the CMA has ruled that AWAL’s acquisition is not enough to substantially reduce competition by itself, it is part of a pattern that threatens to gradually erode competition and diversity in UK music if independent entrepreneurs continue without much-needed access to capital”.

Honing in on one specific argument put forward by Sony during this investigation, he added: “Sony arguing that even a hugely successful independent like AWAL would have struggled to maintain its position alone highlights the sector’s need for better support to scale-up. Without pathways for growth for independent entrepreneurs, we can expect to see a gradual erosion of competition across the sector, damaging innovation, diversity and leading to less favourable conditions for artists”.