EU Opens Sony / Bertelsmann Probe

EU regulators opened an in-depth probe March 1st into Sony Corp. and Bertelsmann AG’s 2004 deal to merge their music units, saying officials needed to thoroughly analyze it to check if the record labels would have a monopoly position.

It is the second time the European Commission has to look at the deal it cleared in July 2004, after an EU court ruled last summer that authorities were wrong to have approved it first time around.

Regulators were ordered to look at the agreement again, sending lawyers into a flurry because it undermined the legality of the Sony-BMG deal that formed the world’s second-largest record label and brought Sony artists like Aerosmith, George Michael and Barbra Streisand and BMG’s Avril Lavigne and Elvis Presley under one roof.

The European Commission now has four months, until July 2, to make a final decision to clear or block the deal.

Regulators said they will evaluate it using current market conditions, taking into account recent developments, citing the growing sales of online music. It said one of the main issues in their investigation would be to decide if the deal would create or strengthen a collective monopoly among the major music recording companies.

The Sony-BMG deal shrank the number of major music companies from five to four.

In its first approval, the EU’s executive arm had assumed there was no record industry monopoly because there were a variety of products on the market and no open disputes between the five main companies.

But the EU’s second-highest court found that regulators did not properly support a theory that promotional discounts ultimately prevent a joint monopoly from occurring. It also said the Commission was wrong to rely on the absence of evidence that record companies had used retaliatory measures in the past.

It backed a challenge from the independent record label group Impala, which represents 2,500 independent music firms, ruling that regulators did not properly show in 2004 that there was not a monopoly position before the deal or that there would not be one afterward.

Impala said it was pleased that the new investigation would cover other issues than price, which was the main focus of the original probe.

“Impala’s members have raised specific concerns about their reduced market access. These include the collective dominance of the majors and coordination of competitive behavior in retail, radio and television, press and other media, as well as in the vital online market,” it said in a statement.

EU regulators should take as a template Impala’s recent deal with Warner that made promises on how Warner could combine with EMI without hurting small players, the group said.

Bertelsmann said last year the surprise Court of First Instance ruling made no real difference to the business, which has been up and running since August 2004.

If the EU clears the deal again, there is a legal precedent for it to demand selloffs or changes to business behavior to overcome antitrust concerns. It is very unusual for it to block deals, but such a decision could also see it force Sony and BMG to undo their joint venture.