Faced with the need to meet the high burden of proof imposed by the European Court for prohibiting a merger (ie that it would significantly change matters for the worse) the EC Commission concluded that four recorded music “majors” would not enjoy a position of collective dominance. The marriage of Sony and BMG was therefore permitted.
Contrary to expectations, the text of the decision that was published today shows that the EC Commission does not regard illegal downloading as a factor that dilutes the majors’ collective economic power and which therefore justifies consolidation. Although illegal downloading is discussed, it is not a material factor in the authorisation decision.
Instead, much emphasis is placed on whether the merger would increase market transparency: such transparency would enable majors to collude and decreases the incentives for price competition. Although Published Prices to Dealers (PPDs) are transparent, in contrast to the position taken in its objections to the proposed EMI/Time Warner tie-up, the Commission felt this transparency was not in itself sufficient to justify blocking the merger as discounts are often secret – albeit observable by the majors’ sales forces. The lack of transparency gave continued scope for secret price cutting from which the consumer might benefit.
On the next important issue (whether any scope for price competition is negated by the risk of retaliation) the Commission was satisfied by the fact that there was no evidence of past retaliation (for example, in the form of exclusion or threatened exclusion of the price cutter from compilation albums). Therefore it could not prove the existence of a dominant position.
Although the “indies” may challenge the finding in the European Court, to be successful, they would have to show that the EC Commission had made a very serious error. So the next important question is therefore what impact, if any, the EC Commission will have on further consolidation in the recorded music market which it regards as inevitable and on which it is has promised to keep a close eye.
The financial markets seem to regard a merger between EMI/Time Warner as likely to escape significant regulatory problems this time. Provided that individual positions of dominance – particularly in publishing are avoided, this seems right.
However, today’s decision may contain a sting in the tail. Noting that the transparency in the market for online licences is very high and that scope for secret discounts is very low on the Internet, the decision states that the reduction from five to four majors does increase transparency in this market. However, whilst the online market is small in comparison to the traditional recorded music market and is in a state of flux, the Commission was not prepared to oppose the merger. The possible implications of this viewpoint will not be lost on the majors – nor on the indies as the online market matures.