Universal/EMI Halts Favored Nations In EU, But U.S. Digital Dealmaking Still Affected

Universal Music Group today officially completed its $1.9 billion acquisition of EMI’s recorded music division, combining labels like Capitol Records, Def Jam Recordings, EMI Records, Interscope Records, Island Records, Motown Records, Virgin Records, Verve Music Group and many more under one very large roof. While major stipulations and conditions behind the deal are well known by now, one important detail has perhaps been a bit overlooked: Universal has committed to banishing Most Favored Nation clauses from contracts with digital music companies in Europe for the next ten years, which means that Universal will no longer get the benefit of any favorable pricing deals cut with rival labels.

“An upside of this for the digital service providers is that now when they negotiate or renegotiate a licensing deal with UMG/EMI, they don't have to worry that down the line they will be obligated to pay UMG more money than originally negotiated for because another licensor was able to negotiate better terms,” said entertainment attorney Daniel Turner.

For the moment, this development appears to only affect EMI-Universal’s contracts with European-based DMCs, but entertainment attorney Jon L. Duman says this can get confusing fast since many of these companies are affiliated/co-owned with US-based DMCs.

“Ultimately, until EMI-Universal officially expands this policy to apply to all contracts with DMCs on a worldwide basis, the extent to which it affects US-based DMCs will vary on a case-by-case basis, depending on the deal, as well as the relationship between a particular European DMCs and their U.S. counterparts,” Duman added. “This development will presumably only affect future deals it negotiates, since EMI-Universal can’t simply unilaterally re-negotiate deals already in place with DMCs, whether European or US-based.”

Despite growing concerns from critics of the deal, Universal Music Group chairman and CEO Lucian Grainge believes that this merger is the next step towards “ensuring the health” of the music industry: "We remain true to our vision of investing in EMI, growing the company as a vibrant source of new music, offering consumers more choice and supporting the growth of online music services.”

“Ensuring health” may not come to mind right away for the music technology sector or those who seek digital music innovation. Whether a new service or just a new feature added to an existing service (that would required a non-traditional license), one now must now make a deal with Universal – that, or go without 40% of the new music sold globally.

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