Sony BMG Ruling Causes Major Upheaval

The international recorded music industry is in upheaval after a court ruled that the European regulatory authority must take another look at the Sony BMG merger.

The European Court of First Instance has backed the indie music companies and said the European Commission didn’t take sufficient account of whether the deal would or could lead to the majors gaining further dominance of the market.

By annulling the monopoly commission’s 2004 decision to allow the Japanese electronics giant and the German media conglomerate to pool their recording business, the court has put the whole industry in a state of flux.

Before Impala, the European indies organization that brought the case, would have had time to pop the champagne corks, EMI shares fell nearly 10 percent as the ruling raised serious doubts about its tie-up with Warner.

Financial analysts all over the globe were waiting to see what impact the European Court of First Instance decision would have on Warner shares when the New York Stock Exchange opened hours later. They fell just more than 16 percent in the first two hours of trading.

Investors in both companies have done well. Their share prices have risen steadily in recent weeks, fueled by the news that one firm would almost certainly buy the other.

The fascinating and very public sparring match that has seen Edgar Bronfman Jr. and Warner’s corporate backers shadow-boxing with EMI chiefs Alain Levy and Eric Nicoli may have reached the final bell.

It could well be the scrap’s not worth winning now that it’s far from certain the European regulators would recognize the outcome.

Business writers, mainly in the U.K., have made light of the authorities having any objection to the EMI-Warner deal, many of them using it as an example of how the Commission is “allowing” such mergers because startling growth in downloading has made selling music a much harder business.

They’re now left pondering how to write pieces that, without any loss of face, can put forward exactly the opposite view in the weekend editions.

The European Commission, which nodded the deal through in the first place, has a couple of months to decide whether to appeal against the EU court overturning its decision.

The Mohn family that owns BMG, which is auctioning its publishing business to help raise the cash it spent buying out its only other major shareholder, is now faced with the prospect of going back to court to keep its joint-venture record company intact.

An EMI-Warner merger would have meant having to sell one of their publishing companies – for the buyer to raise cash and to keep the monopoly watchdogs happy. But with that on hold, BMG would at least be the only copyright collector up for sale.

If that’s the case, then Vivendi’s Universal – with its pockets full of enough cash to buy the publishing interests of either Warner, EMI or BMG – may now find the German company is its only option.

While the dust is still settling and Sony, BMG, EMI, Warner and even Vivendi are all probably calling board meetings, Impala president Patrick Zelnick was no doubt enjoying his first week on the job.

Within hours of the decision, the organization quoted him saying, “This is a watershed in European affairs. A landmark judgment for music.

“There is no doubt that it will block any further mergers and will transform how music and other creative sectors are treated. We have proved that, by acting collectively, we can challenge the unchallengeable.

“We will make the terms of the UNESCO convention on cultural diversity a reality in the market place. The EC will now promote cultural diversity under Article 151 (4) of the EC treaty and carry out a proper cultural diversity impact assessment across its decision making.”

Impala’s case also claimed that the merger clearance process is biased toward large corporations and lacks transparency, and that third parties who oppose a merger have few rights compared to the notifying parties and extremely limited access to the Commission’s file.

News of the court’s decision coincided with EMI’s AGM July 13th. Later in the day, the company put out a statement that said: “EMI Group notes the decision of the European Court of First Instance to annul the European Commission’s decision authorising the Sony BMG joint venture.

“This judgment is about how the Commission undertook its assessment of the Sony BMG case in 2004 and the particular evidence presented in that case. It will require detailed study before any wider conclusions can be reached.”

– John Gammon