Sony BMG forced to break up?

Posted on 14 Jul 2006 at 11:16

Europe's anti-monopoly authorities struck another blow yesterday when the European Court of First Instance - the EU's second highest court - struck down the approval of a joint venture between two of the world's biggest companies Sony and Bertelsmann AG to form the media business Sony BMG. It now means that the European Commission will have to reconsider its 2004 decision to allow the two groups to merge.

The Court granted an appeal by the Independent Music Publishers and Labels Association (Impala), an association of around 2500 music production companies, that the deal would concentrate power in the music business into a small cartel of industry giants and harm competition.

The announcement came only a day after Microsoft was fined £200 million by the EU for non-compliance with the 2004 anti-trust ruling.

The Commission's decision to allow the merger was based on assumptions that there were a number of companies competing in the market, the wide variety of music available and from the absence of any retaliatory measures by the five largest music-publishing companies against recalcitrant outsiders.

The Court said that these assumptions were naïve. In a statement the Court said that the Commission's conclusion that there was not 'a collective dominant position' or quasi-monopoly followed an 'extremely cursory examination' and by way of supporting evidence gave 'only a few superficial and formal observations.'

It also threw cold water on the idea that because there are no other examples of retaliatory action taking place meant it could never happen. For example, the big five could choose to punish a non-compliant record company by excluding its material from compilations. The mere threat was sufficient to bring renegade music companies into line. As the Court observed, when 'companies comply with the common policy there is no need to have recourse to sanctions'.

The Court also criticised the Commission for the bizarre logic that said that the existence of 'promotional discounts' must mean that competition was working in the music business and would prevent the creation of a cartel. It called the decision 'a manifest error of assessment'.

Although the Commission has to look again at the merger, it does not follow that Sony BMG will be forced to break up. The Commission may once again decide to approve the merger. Company officials expect to resubmit their merger plans to the Commission within seven days and they may decide to appeal the case further. Sony BMG has two months to consider its next move.

Author: Steve Malone