Sony Music’s $430M AWAL Deal Provisionally Cleared By UK Watchdog

LONDON – Sony’s $430 million acquisition of Kobalt Music Group’s independent distribution and label division AWAL has been provisionally cleared by the U.K.’s competition watchdog after an investigation found that the merger “does not substantially reduce competition.”

The Competition and Markets Authority (CMA) had launched a phase two in-depth investigation into the deal last fall amid concerns that it could lead to worse terms for artists and consumers. At the time, the CMA said it was concerned that the loss of competition between Sony and AWAL might make it harder for indie acts to strike favorable deals, potentially denying them the chance to gain greater ownership of their rights.

Having thoroughly examined the merger, the CMA announced Friday (Feb. 11) that it has “provisionally concluded that the deal does not substantially reduce competition in the U.K. and may not be expected to do so in the future.”

“We have carefully assessed whether this merger will lead to negative outcomes for the market, artists and, ultimately, music fans, now and in the future,” said Margot Daly, chair of the independent CMA Inquiry Group. “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 Daly.

As part of its investigation, the CMA analyzed a wide range of evidence, including thousands of internal documents from both firms, as well as submissions from competitors and customers, and the watchdog’s own analysis of the U.K. recorded music market.

One area the regulator focused on was the extent to which AWAL and Sony’s indie distribution arm The Orchard may have been expected to compete, should the merger not go ahead.

The CMA concluded that The Orchard and AWAL were not close rivals due to their different areas of focus, with The Orchard predominantly focused on offering label services and AWAL concentrating on artist services. While that may have changed in the future, there are many other providers who “will continue to compete effectively with both firms,” said the CMA, including independent labels and distributors, and other major labels’ artist and label services divisions, such as Warner Music’s ADA.

The CMA probe also looked at how closely Sony and AWAL would compete to sign successful artists. After reviewing the evidence, the CMA determined that AWAL is a “relatively small player” when it comes to signing artists that require higher levels of investment and could only be expected to compete with Sony “on a limited basis.”

The CMA noted that many other firms in the U.K. provide independent labels and artists with distribution services, such as Believe, Empire, PIAS, OneRPM and CDBaby, that would make up for the limited loss of competition from AWAL.

While Kobalt doesn’t break out AWAL’s operations by geography, overall the company says 45% of all of its revenue, including publishing, is derived from the U.S. marketplace. In the year ended March 30, 2019, AWAL had revenue of $106.2 million while its neighboring rights divisions had collections of about $65 million. Billboard estimates that AWAL’s global market share is around 1-2%.

The CMA investigation relates only to Sony’s purchase of AWAL and not its acquisition of Kobalt’s neighboring rights business, which collects master recordings performance revenue for artists and was part of the $430 million deal, announced Feb. 1.

In a statement, Sony Music Entertainment said it welcomed the CMA’s provisional ruling and recognition of “the competitive and dynamic nature of the U.K. music market.”

“Our investment in AWAL will deliver real benefits for artists and consumers, amidst intense competition at every level of the music industry,” said the major label, which will earn an estimated $1 billion in revenue from distributing independent labels through its The Orchard and AWAL operations.

Responding to the CMA’s findings, Paul Pacifico, CEO of U.K. trade body the Association of Independent Music (AIM), said the merger was “part of a pattern that threatens to gradually erode competition and diversity in U.K. music.”

“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,” said Pacifico.

Although the CMA’s provisional report is good news for Sony Music, a final decision on whether to fully clear the merger is still to be made and a three-week consultation period now begins. As part of that process, the competition watchdog is seeking responses to its provisional findings, which will feed into its final decision. The statutory deadline for the CMA to publish its final report is Mar. 17. Sony Music says it will continue to work with the CMA during the final stages of its investigation.

In the meantime, the competition watchdog is pressing ahead with its review of the music streaming business, which formally launched Jan. 27 and is looking at any possible competition concerns related to music streaming services and the major labels’ dominance of the U.K. industry. The CMA has 12 months to carry out its market study and deliver its findings, including any action it decides to take.

In the U.K., the three majors — Universal Music Group, Sony Music Entertainment and Warner Music Group — make up 75% of the recorded music market, with independents accounting for the remaining 25%, according to the Association of Independent Music (AIM). Streaming now accounts for 83% of all music consumption in the U.K., according to labels trade body BPI.