The music business, to say the least, ain't what it used to be. To be precise, the industry has shrunk by about 50% since Napster's heyday, and virtually nobody expects it to fully bounce back. The major labels know this and have tried just about everything to remain dominant, including suing the pants off of music-pirating consumers via the RIAA. What, you might be wondering, is their next move?

In the hopes of gaining some leverage in this new music ecosystem, Universal Music Group wants to acquire EMI, a move that would reduce the number of major labels from four to three. It would certainly help Universal, but not everybody is overjoyed at the prospect. Among the concerns expressed about the proposed merger is the possibility that it would hurt innovation in the digital music space.

The Universal-EMI merger, which still faces regulatory scrutiny in both Europe and the United States, is not a done deal. If allowed to go through, it would give Universal control of more than 40% of the market. Traditionally, a merger of this size would likely be struck down due to antitrust concerns, but it just may be that the beleaguered music industry could win over regulators.

The Threat to Streaming Services

The deal would not only put other music labels in a tight spot - it could also hamper innovation in certain sectors of the digital music ecosystem. In particular, any service that relies on licensing deals with the major labels for content could find itself negotiating with a bigger, more powerful mega-label.

"It's going to mean that services like Pandora or Spotify, or anyone along those lines, are going to have a very difficult road ahead of them to maintain the current rates," says Refe Tuma, a blogger and music industry analyst.

Services whose business models depend on acquiring the streaming rights to music content already pay massive fees to the major labels. That's why Pandora isn't profitable yet, and working out those financial details is why Spotify took so long to launch in the United States. Those costs could get even higher if Universal and EMI become one.

To illustrate the potential impact an even larger Universal would have, Tuma points to how the label tried to bully French streaming service Deezer into adopting a more restrictive listening policy for its free users. When Deezer refused, Universal tried to pull its entire catalog from the service, a move struck down by the courts for being "an abuse of a dominant position."

In the ultimate ironic twist, if the user experience of emerging music services ends up degrading, research suggests that more users could return to piracy as a way of acquiring music, a major source of Universal's woes in the first place.

Deterring New Music Startups

In addition to making life more difficult for existing digital music companies, it could also make the barriers that much higher for startups looking to launch the next Spotify or Turntable.fm.

"There are tremendous hurdles to bringing a legitimate digital service to the marketplace," says Casey Rae-Hunter, deputy director of the Future of Music Coalition. Music fans want a highly comprehensive selection, something that's already difficult for digital music services to achieve.

"Further concentration among the majors would create conditions where the terms of who gets to play and for how much would be dictated by an even smaller assortment of powerful players," warns Rae-Hunter.

It's not all bad news, insists Jason Herskowitz, chief product officer at Official.fm. While the merger may well have negative effects, it could also simplify the process of securing deals with labels, which can be rather cumbersome for startups.

What About the Artists?

The music industry is pretty unusual if you think about it. In any other business, this much turmoil and financial uncertainty would result in fewer participants in the marketplace, Tuma points out.

In the music space today, however, new players seem to keep popping up left and right. Technology has made music-making easier than ever, and more people are doing it. It seems like there's a new online music startup launching every other week.

That sure is a lot of activity for an industry that's supposedly dying.

Tuma attributes this somewhat counterintuitive fact to the inherent passion that musicians and others feel about music and the industry that supports its. It's not a lucrative endeavor for everyone, but there is nonetheless something that compels many to get involved.

It's possible that the frustrations of a more top-heavy recording industry could weed out some of the players without that genuine passion and alter the marketplace accordingly.

"For the people who are motivated by this X factor, I think they're going to continue to try to plow inroads and work around whatever the obstacles are that the major labels put in their way," says Tuma.

It could also expedite the arrival of a world in which fans are less dependent on major labels to supply the music they love, a trend which is already in its early stages.

Artists already get a raw deal when it comes to streaming services, for example. A few prominent bands have pulled their catalogs from the likes of Spotify and Rdio over concerns about the low royalty payments they deliver. If the Universal-EMI merger proceeds, independent artists probably shouldn't expect life to get any easier.

"There's probably no major media merger that has resulted in better access or better terms for creators, particularly independents," says Rae-Hunter. "This is something worth taking into consideration."

Music programmer photo by Thomas Bonte

Radiohead photo by Alterna2.