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Saturday, 25 October 2014

The empires strike back

Penguin in bondage hides real risks in media M&A

Three deals from 2012 will reshape the book, music and film industries in 2013: Penguin’s merger with Random House, Universal’s $1.9 billion purchase of EMI’s recorded-music business, and Walt Disney’s $4.1 billion takeover of Lucasfilm. There are sound business reasons for all three. There are also reasons for artists and consumers to fret.

Both Penguin-Random House and Universal-EMI are in industries being upended by the digital revolution. The record labels have had it much worse so far. But both should enjoy economies of scale and improved bargaining power with suppliers and retailers, including digital’s big beasts, Amazon and Apple.

So far so good. Artists can’t thrive in a dying industry. But there are risks too. OK, so Random House’s credentials are solid enough and Universal should fit with EMI far better than previous owners Citigroup or Guy Hands. But clashing cultures can undermine a deal. That danger, omnipresent in M&A, looms particularly large in creative industries. Cartoons that depict a kinky “50 Shades of Grey” Penguin reflect this.

Secondly, creative types may lose influence and cachet. Regaining power through scale cuts both ways - with both retailers and suppliers, which includes artists. Concentration may curtail bidding wars for talent.

And the cultural landscape could suffer. True, electronic self-publishing offers authors and bands an unprecedented, direct route to audiences. But the mainstream matters. With less competition, big houses have less incentive to take risks by signing mavericks.

At worst, freedom of expression could be tested. Rupert Murdoch famously stopped HarperCollins printing a memoir China disliked. A smaller circle of book giants, several inside wider business empires, might hesitate to speak truth to power. (A big news-media deal, like the sale of the Financial Times, could face tough scrutiny for similar reasons).

The third tie-up, Disney’s purchase of George Lucas’s studio, has also inspired caricaturists: Mickey Mouse as Darth Vader, for instance. Disney can use the Star Wars characters to power a string of blockbusters and adorn everything from bedspreads to fizzy drinks. However, this does tip Hollywood even further towards heavily merchandised, teen-targeted film “franchises”. Real cinephiles might prefer to see the sun set on this kind of empire.

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European and U.S. regulators approved Universal Music Group’s $1.9 billion purchase of EMI’s recorded music arm in September. In order to preserve competition, the European Union required Universal to sell labels accounting for about one-third of EMI’s revenue, including Mute, Chrysalis, Virgin Classics and EMI units in nine EU states. Universal, owned by Vivendi of France, was already the world’s largest recorded-music group.

On Oct. 29 Bertelsmann and Pearson agreed to combine their respective book publishing arms, Random House and Penguin, into a joint venture. Bertelsmann, the privately owned German company, will own 53 percent of the JV, which excludes Random House’s German-language business. The combined group will have about a 25 percent share of the global consumer publishing market, according to Standard & Poor’s.

Walt Disney Co agreed to buy George Lucas’s Lucasfilm Ltd for $4.05 billion in cash and stock on Oct. 31. The takeover is the largest in the motion pictures sector since Disney’s purchase of Pixar Inc for $6.5 billion in 2006, Thomson Reuters data show.

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