No more Sony BMG? Fate of 2004 merger cast in doubt by EU court

Posted by Scott M. Fulton, III

Luxembourg - The European Union's Court of First Instance - the counterpart of the Federal Appeals Court in the US - has annulled a European Commission decision from July 2004 that enabled Sony Corp. and publishing giant Bertelsmann AG to spin off portions of their music divisions and merge them into the 50/50 joint venture known today as Sony BMG. While this does not undo the merger yet, it does cast its fate into extreme jeopardy.

In announcing its annulment, the Court noted that the Commission (which includes its panel on competitiveness) had actually notified both Sony and Bertelsmann on 29 May 2004 that their plan, as they had presented it, was incompatible with EU law - specifically that "it would reinforce a collective dominant position on the market for recorded music." That decision clearly stated the deal would promote "tacit collusion" in the recording industry, where the remaining major players (presumably four) would effectively set prices for CDs and other recorded music media.

But after meeting with officials from both companies, the EC completely changed its mind, stating in a decision the following 18 July that the joint venture would lead to promotional discounts that, to borrow the Court's language, "have the effect of reducing the transparency of the market to the point of preventing the existence of a collective dominant position." In other words, the EC's new theory went, if the remaining players started competing with one another on price point, they wouldn't be able to guess each other's moves so easily, so there'd be no collusion between the players...and thus no dominant position among whichever player could set the most lucrative prices.

"The elements on which that argument was founded were incomplete," the Court of First Instance stated, "and did not include all the relevant data that ought to have been taken into account by the Commission. They were therefore not capable of supporting the conclusions drawn from them."

The EC's competitiveness spokesperson, Jonathan Todd, responded to the ruling by essentially saying the only setback this creates is for Sony and Bertelsmann, which now have to re-present their cases for the merger. "The effect of today's (court) ruling is that the parties will now have to re-notify the venture, and the commission will have to conduct a reanalysis of the merger," Todd is quoted by Dow Jones as saying. "Their lawyers will have to...start getting ready." The EC could still conceivably file an appeal, but may wait to see how Sony and Bertelsmann, and their said lawyers, react.

Sony BMG came to prominence in the pages of TG Daily as the music publisher whose CDs contained a copy protection scheme that used rootkit-like stealth that damaged some users' PC operating environments. The publisher has since discontinued the use of that scheme, apologized to its customers, and changed its policy.

Following today's Court ruling, both Sony and Bertelsmann issued the following identical statement: "We are studying the judgment carefully and shall discuss the appropriate next steps with the European Commission." Warner Music Group later issued an amended statement: "We are in the process of reviewing today's decision by the European Court of First Instance regarding Sony BMG to determine what impact it might have on a potential combination of Warner Music Group and EMI Group plc." Warner and EMI have been actively combating one another with dueling potential merger deals, each one describing the swallowing of the other.

In the wake of the ruling in the States, shares of Sony were trading lower by 2.5% in late morning, at about $41.85 per share. But tumbling in value this morning were shares of Warner Music Group, whose likelihood of ever merging with EMI - whether as its own tail swallowing the head or its head being swallowed by the other one's tail - is now also in doubt.

But also cast in doubt today is the substance of European Commission rulings. Today's annulment proves no decision is too big for the Court of First Instance to cast aside. A decision from the Court on Microsoft's pending appeal of the EC's 15 December 2005 antitrust decision could come this October; and Microsoft may yet appeal yesterday's EC fine of $356.6 million. If annulments come as a result there as well, EU adjudicators could be compelled to call into question whether a legislative body like the Commission should also have the right to judge.