The Court of First Instance, EU's second-highest court, has overturned the European Commission's approval of the merger between the music units of Sony and Bertelsmann, forcing them to request clearance for the deal again. Both companies said they would study the ruling and discuss with the EC, but did not believe it undermined their business. This is the first time the courts have overturned an EC decision to clear a deal and analysts said it could lead other companies to call off merger talks.

The EC had unconditionally approved the 50-50 JV between Sony and Bertelsmann's BMG in 2004 after finding insufficient evidence that the deal would harm consumers. The court backed a challenge by independent record label group Impala, which represents 2,500 independent music firms, and said regulators did not properly show that there was not a monopoly position before the deal or that there would not be one afterward.

The court said regulators did not also clearly show why they reversed their position after first alleging that the deal could create "tacit collusion" in the industry, leading to higher CD prices and less choice for consumers. Even after it cleared the tie-up, regulators warned that they would watch the industry closely. Sony and BMG argued they needed to join forces to deal with declining CD sales and the threat from illegal downloading on the Internet.Regulators had assumed there was no record industry monopoly because of the variety of products on the market, and lack of open disputes between the five main companies. But the court said regulators did not properly support a theory that promotional discounts ultimately prevent a joint monopoly from occurring.

Sony and BMG must now resubmit their applications for antitrust clearance based on current market conditions within seven days. The EU must carry out a new analysis of the deal, looking at current market share, customer base and contracts with artists. If the EU clears the deal again, there is a legal precedent for it to demand sell-offs or changes to business behavior to overcome antitrust concerns.

Meanwhile, shares in Warner Music Group fell 15% to $25.29 in New York, while EMI Group fell 8.4% to 280.25p on the London Stock Exchange. Warner and EMI scrapped a proposed merger four years ago on EU antitrust concerns, and have been bidding for each other since. EMI said "detailed study" would be required before any wider conclusions about a tie-up could be made, while Warner Music said it was still weighing the judgment. Impala said it would fight any tie-ups between big record labels, saying it believed EU approval for the deal was unlikely. A combination of EMI and Warner Music would control about 25% of the recorded music market, moving into second place behind Universal.

NamNews - Friday 14th July 2006

 

See column on the right for related news items
or search our NamNews Archive containing over 9 years of industry news (Subscriber-only)