EU Gives Sony BMG Union Second Blessing After Closer Look

Three years after Sony Music Entertainment and BMG Entertainment finalized their Sony BMG joint venture, antitrust regulators from the European Union have again cleared the music industry deal . The decision followed a court-ordered review of the impacts on small record labels.

European Commissioner for Competition Neelie Kroes made the announcement Wednesday. The Court of First Instance, Europe's second-highest court, had put the future of Sony BMG in doubt 15 months earlier by saying the European Commission had erred in its review of the merger before its initial approval.

That decision not only sent the Sony BMG case back to regulators, but also helped freeze other potential merger activity in the music industry on the continent -- such as the repeatedly on-again, off-again combination of Warner and EMI.

Sony BMG combined the music businesses of Japan's Sony and Germany's Bertelsmann.

The second review re-examined the case "from top to bottom, looking not only at what we think likely to happen on the markets, but what has actually happened on the marketplace from 2004 to today," Kroes said.

"We have conducted an extraordinarily detailed analysis, looking at millions of individual pieces of data, and building up as complete a picture as we possibly could as to the workings of these markets. We concluded that this merger was not a threat to competition, and have therefore cleared it without conditions," she noted.

The commission found "no evidence to support any theory of actual or likely anticompetitive effects of this merger," Kroes added. "This has been a long and very thorough investigation. I am confident in the conclusion reached: This merger poses no competition problems."

Errors in Assessment

In July 2006, the court ruled that regulators had made "manifest errors of assessment" in their initial review of the merger, in particular by failing to take into account how small independent record labels would be affected by the creation of the super-label. The EC had conducted an "extremely cursory examination" of the deal's pricing and distribution ramifications, the judges said.

That decision came after IMPALA -- the Independent Music Publishers and Labels Association, representing some 2,500 small record labels -- asked the Court of First Instance to step in and order a new review.

IMPALA on Wednesday expressed disappointment at the decision and said it would seek a formal review by the European Ombudsman and possibly appeal the ruling again.

With the merger intact, Sony BMG and Universal together control 50 percent of the overall market and 70 percent of the top 100 most popular musical acts in Europe, IMPALA said, creating what the group considers a duopoly.

"The commission has simply repeated its previous mistakes," said IMPALA Chairman Martin Mills, who heads up the Beggars Group label. "It's hard to avoid the conclusion that this is a victory for well connected and influential big business at the expense of entrepreneurs, consumers, music fans and artists."

Pricing Issues

The group also said the decision seemed to ignore concerns about maintaining cultural diversity, as the EC is required to do by charter.

The EU has had several high-profile antitrust cases on its hands in recent years, with most of the actions taken to ensure European businesses have a fair shot at competition, said Yankee Group analyst Laura DiDio, and may suggest a broader view of the music industry is being taken.

The decision doesn't necessarily mean regulators will take a more favorable view of Apple's (Nasdaq: AAPL) iTunes, however, which is in the crosshairs of regulators in some individual countries as well as the EU itself because of the iTunes-iPod tie-up and cross-border pricing issues.

"The EU has shown it will be tough when it feels there is a risk to consumers or businesses based in Europe," DiDio told the E-Commerce Times. "I don't think that bottom line has changed."

Waiting in the Wings

The decision could reignite interest in the Warner Music-EMI merger that has been discussed at length over the past several years, with the two sides exchanging a slew of proposals that would have led to a US$4 billion merger. Earlier this year, EMI's board decided instead to sell itself to a private equity consortium.

Warner had already moved to address some of the possible questions that would be raised about the impact of that merger on independent labels by announcing efforts to help those labels more broadly distribute their music, JupiterResearch analyst Mark Mulligan told the E-Commerce Times.

Music labels have argued that consolidation remains necessary as they try to lower costs amid plunging CD sales , which are being replaced by lower-priced digital music in many cases.

Although the EU had rejected a merger between Bertelsmann's music group and Universal on the grounds it would create a single player with too much market share, the Sony merger was approved the first time because regulators recognized the goal was not dominance but survival, Mulligan said.

The second approval comes after the EU had the chance to review actual sales data for two full years. "Regulators are recognizing that the music industry has changed and will continue to change," he said.