Tuesday 17 July 2012, 12:03 | By

IMPALA co-president backs Universal’s EMI deals, subject to concessions

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In a surprise move, one of the key players in Europe’s independent label sector, Naïve Records’ Patrick Zelnik, has come out in support of Universal’s bid to buy the EMI record company, subject to certain provisions, which he outlines in an article in today’s Financial Times, neatly timed to fall into the laps of European regulators just as they consider what concessions they should ask for from the mega-major as it seeks approval for its big EMI deal.

The opinion piece arguably puts Zelnik in conflict with pan-European indie labels trade body IMPALA, of which he is co-president. Though, while IMPALA has, officially at least, been vehemently opposed to the Universal bid from the start, insisting European regulators must block the deal outright, realists in the indie label community have long assumed that the battle against the EMI acquisition was more about securing the best possible concessions from the Vivendi-owned music major, rather than blocking the transaction completely.

Zelnik cautions against outright war within the record industry, between Warner and the indies on the one side, and the two big acquisitive players, Sony and Universal, on the other. The Naïve man argues that there are bigger threats to the record business. First, the risk of failing to find a truly mutually beneficial framework for working with the web and tech giants who now dwarf even the bigger music majors. And second, allowing private equity to come into the industry, asset strip the lucrative catalogues for a five year return on investment, to the detriment of new talent development, which safeguards the industry’s future ten years down the line.

Universal buying EMI is probably the lesser of various evils, Zelnik concludes, despite his past involvement in the fight against the consolidation of the music rights industry. Providing, that is, as part of Universal’s big EMI bid, certain provisions are met.

He writes that Universal should commit “first, to transparent, non-discriminatory, easy licensing to new platforms. This should encompass Universal, EMI and independents, representing the majority of the market – the rest would soon follow. Second, Universal should make targeted, surgical divestitures to independents instead of to hedge funds, private equity or pension funds. Independents reinvest their profits better in signing new artists and developing new genres, and are instrumental in musical and technological innovation that is the lifeblood of music. Third, there should be direct financial support for industry groups that aid in levelling the playing field between small and large labels, so that the innovations of entrepreneurial labels are quickly adopted by the rest of the industry”.

It should be noted that Zelnik is not entirely neutral in all of this. He has long been an advocate of more transparent licensing in the digital domain, and clearly sees this as an opportunity to force Universal into a commitment on transparency that isn’t necessarily in its best commercial interests. While point three, if fulfilled, would presumably see Universal more proactively supporting organisations that support the indie sector, such as, for example, IMPALA, in which Zelnik is so involved. (A few years back, when the indie sector struck up a deal with then Warner chief Edgar Bronfman Jr in which it agreed to not oppose his ultimately unsuccessful bid to buy EMI, it’s thought a similar request was made).

But point two is perhaps where Zelnik’s real conflict of interest exists, given separate reports this morning that the Naïve chief is preparing to bid for EMI’s Virgin Records division, should Universal decide to sell it in a bid to placate European regulators. Zelnik, who launched the then independent Virgin record label into the French market in 1980, is apparently planning to bid for the modern day Virgin Records, in Europe at least, in partnership with Richard Branson. Though Branson would be a junior partner in the deal, it’s thought, mainly guaranteeing use of the Virgin brand, with the newly independent Virgin, should it be achieved, run by Zelnik.

Also speaking to the FT, Zelnik said: “If Universal is ready to sell Virgin Records, then Richard Branson will support a transaction and support me in doing it. He wants Virgin to be in my hands”.

Responding to Zelnik’s FT piece, IMPALA says that it reflects his opinion, and not that of the trade body, which remains opposed to Universal’s EMI deal. The group’s Executive Chair, Helen Smith, told CMU: “Our board took a clear decision yesterday to continue its opposition to the Universal/EMI merger, rejecting remedies which do not deal with the specific problems set out in the EC’s statement of objections. The issue isn’t just digital, it’s physical and access to media-exposure for new artists, as well as the foreclosure of independents when it comes to signing artists. We all respect Patrick Zelnik’s view, but the FT article is the Naive position, not the Impala position”.

As previously reported, having responded in writing to the European Commission’s statement of objections to its bid to buy the EMI labels, Universal will now meet with EC officials face-to-face to discuss the terms on which they might green light the acquisition. Universal hasn’t officially proposed any concessions to regulators, but boss man Lucian Grainge has said he will, and rumour has it the major’s share in VEVO and EMI’s Virgin division may be among the assets he will propose his company sells.

A separate regulatory investigation is ongoing in the US, though regulators in New Zealand and Japan have approved the deal without remedies.

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