Sony BMG recorded music merger clearance annulled by the Court of First Instance

On July 13, 2006, the European Court of First Instance (“CFI”) reversed a July 18, 2004 decision by the European Commission allowing a merger between music groups Sony and BMG.

This decision was reached in the wake of an application made by the Independent Music Publishers and Labels Association (“Impala”), an international association representing the interests of 2,500 independent music production companies, on December 3, 2004, after the Commission reversed an earlier decision stating that a combination would increase concentration and was incompatible with European Community law.
The CFI said that the Commission did not sufficiently demonstrate either the non-existence of a collective dominant position before the concentration, or the absence of a risk that such a position would be created as a result of the concentration. Furthermore, the court criticized the Commission for executing an extremely superficial investigation of whether the two companies could achieve a collective dominant position through the merger.

The Commission has indicated that Sony and BMG will need to re-notify their merger, which has already been implemented. Should this happen, it will be examined under the old merger regulation 4064/89. In such a case, the Commission or Sony BMG may also appeal the CFI’s decision to the Court of Justice on points of law.

Representative of both companies said they would re-submit the deal for approval within a week. A decision could take as long as five months. If that petition fails, executives may be forced to undo the partnership that collected $4.2 billion in revenue last year and was responsible for more than 25% of U.S. album sales. The Sony BMG combination reduced the world’s major record companies to four and brought such artists as Aerosmith, Barbra Streisand and Elvis Presley under one roof.

Whatever the outcome, Thursday’s decision put an immediate chill on negotiations between EMI Group and Warner Music Group – the world’s third- and fourth-largest music companies, respectively. Insiders at both companies said further talks about combining them were unlikely until the Sony BMG issue was resolved.
In addition to criticising the Commission’s assessment and legal analysis regarding whether the major recorded music companies were collectively dominant, the CFI also suggested a refinement of the way to assess collective dominance as set out in Airtours v Commission.

Airtours v Commission sets out a three part test to establish collective dominance. First, the market must be sufficiently transparent for firms to monitor each others’ behaviour. Secondly, there must be a deterrent mechanism that can be used to punish a firm not adhering to agreed behaviour. Finally, competitors not participating in the co-ordination should not be able to jeopardise the results expected from the co-ordinated behaviour.

However, the Judgment suggests that these conditions may be established indirectly, where there are a number of factors suggesting collective dominance, such as a close alignment of prices over a long period of time, especially where they exceed a competitive level, and the existence of an oligopolistic market and stable market shares.
The Judgment appears to suggest that in such circumstances, collective dominance may be presumed to exist and the burden will switch to the merging parties to provide an alternative reasonable explanation for these high prices, stable market shares and other such factors.

Authored by

Andre Barlow
202-589-1838
abarlow@dbmlawgroup.com