Sony, BMG Refile Merger Request With EU

By | February 1, 2007 at 11:01 AM

Sony Corp and Bertelsmann AG have refiled a request for EU regulators to clear a 2004 deal merging their music units, the European Commission said Thursday.

Regulators have to re-examine the deal they cleared in July 2004 because an EU court struck down their original approval last July, citing “manifest errors” in how authorities decided that combining the two music majors would not restrict customer choice.

The judgment sent lawyers into a flurry because it undermined the legality of the Sony BMG deal that formed the world’s second-largest record label behind Universal, bringing Sony artists like Aerosmith, George Michael and Barbra Streisand and BMG’s Avril Lavigne and Elvis Presley under one roof.

It also raised fears that the EU would have trouble clearing other takeovers in the record industry – now dominated by only four main players – that led to EMI and Warner cooling their courtship last summer.

But Bertelsmann said last year the surprise Court of First Instance ruling made no real difference to the business, which has been up and running since August 2004.

The Commission must now assess the Sony BMG joint venture looking at current market circumstances. It will have to examine market share, customer base and contracts with artists.

It said it has an initial deadline of March 1 to make a decision. That can be extended if regulators decide to launch an in-depth probe – which is likely given the need to fireproof this second approval.

If the EU clears the deal again, there is a legal precedent for it to demand selloffs or changes to business behavior to overcome antitrust concerns. It is very unusual for it to block deals, but such a decision could also see it force Sony and BMG to undo their joint venture.

In July, the EU’s second-highest court backed a challenge from the independent record label group Impala, which represents 2,500 independent music firms. The court said regulators did not properly show in 2004 that there was not a monopoly position before the deal or that there would not be one afterward.

Either one would be enough to strike down regulatory approval.

The European Commission had unconditionally approved the 50-50 joint venture between Japan’s Sony Music Corp. and BMG, Bertelsmann’s music unit, in July 2004 after finding insufficient evidence the deal would harm consumers.

Sony and BMG argued they needed to join forces to deal with declining CD sales and the threat from illegal downloading on the Internet

The court said regulators did not clearly show why they made a late U-turn after alleging in May 2004 that the deal could exacerbate “tacit collusion” in the industry, leading to higher CD prices and less choice for consumers in a market where there is already too little competition.

Even after it cleared the tie-up, regulators warned that they would watch the industry closely.

The Sony BMG deal shrank the number of major music companies from five to four.

Regulators had assumed there was no record industry monopoly because there were a variety of products on the market and no open disputes between the five main companies.

But the court found that regulators did not properly support a theory that promotional discounts ultimately prevent a joint monopoly from occurring. It also said regulators were wrong to rely on the absence of evidence that record companies had used retaliatory measures in the past.

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