UK: The European Court of First Instance Annuls The European Commission’s Approval of the Sony - BMG Merger

Last Updated: 25 July 2006
Article by Ben Challis, Barrister-at-law

Independent Music Publishers and Labels Association v Commission of the European Community Case T-464/04

 Ben Challis Barrister-at-law, Editor of www.musiclawupdates.com

The European Court of First Instance has annulled the European Commission’s approval of the 2004 merger between Sony Music and BMG, which allowed the music industry to shrink from five major companies to four. The case, brought to court by IMPALA on behalf of European independent record labels, has been closely watched by Warner Music and EMI who must now wait and see how Europe's top antitrust authority will react to the court’s decision.

The court considered two pleas brought by IMPALA: The first plea was in regard to the strengthening of a pre-existing collective dominant position in the market for recorded music and the second plea: creation of a collective dominant position on the markets for recorded music.

The Court noted the case-law of the Court of Justice regarding an alleged collective dominant position which has held that the Commission must assess, using a prospective analysis of the reference market, whether the concentration which has been referred to it leads to a situation in which effective competition in the relevant market is significantly impeded by the undertakings involved in the concentration and where … the undertakings involved … are able to adopt a common policy on the market and act to a considerable extent independently of their competitors, their customers and, ultimately, of consumers (Joined Cases C-68/94 and C-30/95 France and Others v Commission [1998] ECR I-1375).

The Court also noted that The Court of First Instance has held that a situation of collective dominance which significantly impedes effective competition in the common market or a substantial part thereof may therefore arise following a concentration where, taking into account the actual characteristics of the relevant market and of the change to its structure brought about by the completion of the transaction, the concentration would have the consequence that, being aware of the common interests, each member of the dominant oligopoly would consider it possible, economically rational and therefore preferable to adopt the same policy on a lasting basis on the market with the aim of selling at above competitive prices, without having to conclude an agreement or resort to a concerted practice within the meaning of Article 81 EC, without actual or potential competitors, or customers and consumers, being able to react effectively (see, to that effect, Case T-102/96 Gencor v Commission [1999] ECR II-753 and Case T-342/99 Airtours v Commission [2002] ECR II-2585).

The court reached the conclusion that the both first and second pleas "are well founded in that the Decision is vitiated by, first, inadequate reasoning and, second, a manifest error of assessment in so far as the elements forming the basis of the Decision do not constitute all the relevant data that must be taken into consideration and are not sufficient to support the conclusions drawn from them." The court then went on to say "It follows that, without there being any need to examine the plea relating to the strengthening or the creation of a collective dominant position on the wholesale market for online music licences or the plea relating to the coordination of the respective activities of the parties to the concentration in the sphere of music publishing, the Decision must be annulled."

The Court held that "The Commission did not demonstrate to the requisite legal standard 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".  The Court said "… in the present case, the alignment of prices, both gross and net, over the last six years, even though the products are not the same (each disc having a different content), and also the fact that they were maintained at such a stable level, and at a level seen as high in spite of a significant fall in demand, together with other factors (power of the undertakings in an oligopoly situation, stability of market shares, etc.), as established by the Commission in the Decision, might, in the absence of an alternative explanation, suggest, or constitute an indication, that the alignment of prices is not the result of the normal play of effective competition and that the market is sufficiently transparent in that it allowed tacit price coordination."

The court held that the findings made in the Commission’s decision concerning the transparency of the market were not supported by a statement of reasons of the requisite legal standard and "are vitiated by a manifest error of assessment". The Court also held that the assertion by the Commission that the markets for recorded music are not sufficiently transparent to permit a collective dominant position is not supported by a statement of reasons of the requisite legal standard and is vitiated by a manifest error of assessment in that the elements on which it is based are incomplete and do not include all the relevant data that ought to have been taken into consideration by the Commission and are not capable of supporting the conclusions which are drawn from them.

When looking at the position post merger (the second plea) the court found that the Commission’s approach had been cursory to say the least noting that the Commission had "devoted less than a page to considering whether the concentration would create a collective dominant position". The court found that there was sufficient evidence to suggest that the ‘reduction of the majors from five to four represented a change substantial enough to result in the likely creation of collective dominance’, particularly as regards transparency and retaliation and that the Commission’s "few observations, which are so superficial, indeed purely formal" could not "satisfy the Commission’s obligation to carry out a prospective analysis and to examine carefully circumstances which, according to each particular case, may prove relevant for the purposes of assessing the effects of the concentration on competition in the reference market, particularly where, as in the present case, the concentration raises serious problems"

The European Commission now has two options: It has two months to appeal the decision to the European Court of Justice or it can accept the decision and now review the Sony BMG. Any new decision by the European Commission would have to include consideration of current market conditions. The decision, which is critical of the Commission’s decision making process itself, may well lead to even longer periods of consideration of complex mergers by the Commission. Some commentators have suggested that there needs to be a system of ‘provisional’ decisions so companies who plan to merge have some idea of the likelihood of success or failure at the regulatory level.

The decision and may well prove a major hurdle to the proposed Warner Music and EMI tie up (both of course operate in the same market as Sony BMG) and EMI's shares dropped 9.2% on the news in morning trading (13th July). Having found the first and second please well founded the court held that it did see "any need to examine the plea relating to the strengthening or the creation of a collective dominant position on the wholesale market for online music licences or the plea relating to the coordination of the respective activities of the parties to the concentration in the sphere of music publishing" (emphasis added). The pricing of music downloads is already subject to a separate European Commission investigation (and also investigations in the USA) and despite the lack of comment on the ‘sphere of music publishing’ the decision may well prove an obstacle to other potential acquisitions and mergers by the major labels and music publishers such as the potential bids by EMI (the world’s leading music publisher) and Universal (which has a 12% market share) for BMG Music Publishing (the worlds number three music publisher with a 13% market share). EMI have said they would jointly bid with venture capital partners who would own the majority of any acquired company but this may not be enough now to satisfy the admonished European Commission.

US opens inquiry into pricing of music downloads
www.guardian.co.uk/frontpage/story/0,,1723218,00.html

© 2006 Ben Challis. This article is for general guidance only. Legal advice should be sought before taking action in relation to specific matters.

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