Competition Policy Newsletter
Following an in-depth investigation the Commission approved ARTICLES the creation of the Sony/BMG music recording joint venture on 19 July 2004 Peter EBERL, Directorate-General Competition, unit B-3
Over the last 15 years, the music industry has a worldwide presence and account together for witnessed the process of gradual consolidation. approximately 80% of the market, both in Europe The Commission has analysed a number of these and worldwide. In the European Economic Area concentrations under the Merger Regulation, (EEA), the rest of the market is composed of a including EMI/Virgin, (1) Seagram/Polygram large number of ‘independents’ with mostly (creating Universal Music), (2) EMI/Time national activities and much lower market shares Warner (3) and Bertelsmann/Zomba. (4)On19 than those of the majors. Following the merger, July 2004, in its most recent decision in this sector Universal and SonyBMG will both have market the Commission authorised the creation of the shares of approximately 25%, ahead of EMI and Sony and BMG's joint venture for recorded music Warner. Some independents were concerned that following an in-depth investigation. The Commis- the increased degree of concentration might lead to sion decided to approve the transaction after a the foreclosure of smaller record labels, for detailed analysis and following the parties' example regarding their access to media and distri- response to the Statement of Objections and an bution. These concerns were carefully assessed in Oral Hearing. the Commission's competitive analysis of the proposed transaction. The proposed creation of the SonyBMG joint venture was notified on 9 January 2004 and was Since 2000, demand for recorded music has therefore assessed under the substantial test of decreased in most European countries. However, Council Regulation (EEC) 4064/89. (5) The joint there are conflicting opinions as to the causes of venture will combine Sony and Bertelsmann's this decline. Whilst the music majors and some recorded music businesses worldwide, except for experts mainly blame illegal downloading (in Japan. The scope of the joint venture covers only particular peer-to-peer file sharing) and counter- so-called ‘Artist and Repertoire’ (A&R) activities, feiting, some recent empirical studies conclude which comprise the discovery and development of that ‘[illegal] file sharing can only explain a tiny performing artists (singers), and in addition the fraction of this decline’. (6) Other explanations marketing and sale of records. By contrast, received in the market investigation pointed to a SonyBMG will not be active in the manufacturing perceived high price level of records and the and the physical distribution (logistics) of records failure of the record companies to satisfy as these activities remain in the hands of each of consumer tastes. However, more recently there the parent companies. Likewise, Sony and have been some signs of a market recovery in the Bertelsmann's music publishing businesses are not U.S., as well as in the UK and some other Euro- integrated into the joint venture. pean countries.
Market structure The Commission's Decision The record industry is characterised by the strong The Commission examined whether the proposed position of the five ‘majors’, namely Universal concentration would create or strengthen a domi- Music, Sony Music, EMI, Warner Music and nant position as a result of which effective compe- Bertelsmann Music Group (BMG) which all have tition would be significantly impeded on the
(1) Case No IV/M.202 – Thorn EMI / Virgin Music; Commission Decision of 27 April 1992. (2) Case No IV/M.1219 – Seagram / Polygram; Commission Decision of 21 September 1998. (3) Case No COMP/M.1852 – Time Warner / EMI; concentration abandoned. (4) Case No COMP/M.2883 – Bertelsmann / Zomba; Commission Decision of 2 September 2002. (5) Cf. Article 26(2) of Council Regulation (EC) No 139/2004. (6) Cf. F. Oberholzer, K. Strumpf: The Effect of File Sharing on Record Sales – An Empirical Analysis, Harvard, March 2004.
Number 3 — Autumn 2004 7 Articles following markets: (i) recorded music; (ii) licences Creation or strengthening of a dominant for online music; and (iii) online music distribu- position tion. In addition, as both parent companies remain active as music publishers, the Commission also On the market for recorded music, the Commis- assessed whether the joint venture would result in sion examined whether the proposed concentra- the coordination of Sony and Bertelsmann's tion would either create or strengthen a collective competitive behaviour in the music publishing dominant position of the four remaining major market which is closely related to the recorded record companies. The market investigation indi- music market. cated a number of market characteristics which appeared to be conducive to collective dominance, The relevant markets such as multi-market contacts due to the vertical integration of the majors, a stable common The market for recorded music comprises the customer base, and the weekly publication of recording of music in different formats, in partic- charts. In addition, there are considerable struc- ular CDs. In this case it was not necessary to tural links among the majors in the form of compi- decide whether this market should be further lation, licensing and distribution joint ventures and segmented on the basis of different genres or agreements. The Commission's assessment was compilations. The geographical scope of the conducted in line with the criteria laid down by the market for recorded music was considered to be European Courts, (1) in particular in the Court of national, in particular because consumer prefer- First Instance's Airtours judgement of 2002. (2) ences and prices vary significantly among According to the CFI, in order to establish collec- Member States. tive dominance, the Commission must prove a common understanding of the companies as to the The Commission concluded that the emerging scope of coordination, for example regarding online music markets are separate from the prices. Furthermore, the markets must be suffi- recorded music market. This distinction is mainly ciently transparent to enable the companies based on differences regarding the modes of involved to monitor whether the terms of the distribution, the scope of the users' rights, and common understanding are adhered to by the other the characteristics of demand (online demand participants. In addition, there must be a deterrent focuses on single tracks whereas the large majority mechanism in case of deviation. Finally, of CD sales are albums). Within online music, customers as well as current and future competi- two markets could be distinguished: (i) the whole- tors should not be able to jeopardise the results sale market for licences for online music where expected from the coordination. online music service providers acquire licences from record companies to exploit the music of In assessing whether there was an existing collec- the artists of these record labels; and (ii) the tive dominant position on the national markets for retail market for online music distribution where recorded music that could be strengthened as a service providers deliver online music to end- result of the concentration, the Commission exam- consumers, either for (permanent) downloading ined whether a coordinated pricing policy of the or (temporary) streaming. The Commission five majors could be identified for the last four considered that both online markets were still years. For this purpose the Commission examined national in scope, in particular because the in a three-step analysis whether there had been any (wholesale) licence agreements are usually alignment of (i) average wholesale net prices, (ii) concluded on a country-by-country basis with wholesale list prices, and (iii) discounts to territorial restrictions and differences in prices and customers. As far as net prices are concerned, the rules of usage. As a consequence service providers Commission analysed the development of average propose country-specific offers at the retail level. wholesale net prices for each major's 100 top- The Commission recognises, however, that the selling albums which cover 70-80% of their total geographical scope of these markets may become music sales. The econometric analysis of these larger in the future if cross-border licence arrange- data showed a certain parallelism of the five ments develop and pan-European online music majors' wholesale average prices in most of the platforms emerge. countries considered. However, the correlation of
(1) Cf. Court of Justice, Joint cases C-68/94 and C-30/95, France v. Commission (‘Kali&Salz’), ECR 1998, I-1375; Court of First Instance, Case T-102/96, Gencor v. Commission, ECR 1999, II-753. (2) Court of First Instance, Case T-342/99, Airtours v. Commission, ECR 2002, II-2585.
8 Number 3 — Autumn 2004 Competition Policy Newsletter
the price development among the majors was not of the five majors in the markets for recorded ARTICLES sufficiently close to establish by itself price coor- music. dination in the past. The Commission also examined whether the Secondly, the Commission therefore examined concentration would create a collective dominant whether any price coordination could have been position on the markets for recorded music. The reached in using list prices, so-called ‘Published proposed operation leads to a consolidation from Prices to Dealers’ (PPDs), as focal points. five to four majors and thereby reduces the number Although some of the majors apply more than of competitive relationships among them. This 100 PPDs in some countries, the investigation would in principle facilitate the monitoring of the showed that each party's five most important PPDs market. However, in view of the lack of sufficient account for 50-80% of their respective total sales, transparency on the level of discounts in the past, depending on the country. In addition, the the Commission did not find sufficient evidence to Commission found that the most important PPDs prove that the reduction from five to four majors in of all majors are usually set relatively close to each itself would alter the market structure substantially other. On the basis of the list price analysis price enough to result in the likely creation of collective coordination would thus have been possible. dominance in the recorded music markets. On the wholesale market for licences for online Thirdly, the Commission looked at any indications music, the Commission examined whether the of coordination on the level of discounts. concentration would lead to the creation or According to the parties, different kinds of strengthening of a collective dominant position of discounts are granted to their customers, namely the majors. As this market is currently emerging file and campaign discounts on the invoice level, and no public industry data is available, it is diffi- as well as retrospective discounts on a volume cult to determine the market positions of the basis and ‘co-op’ spending for marketing different record companies. On the basis of the measures. The market investigation showed that, information collected by the Commission it although the relative importance of these discounts appears that the market positions of the majors on varies to some extent among Member States, the wholesale market for licences for online music invoice discounts are regularly the most important are by and large similar to their positions on the category of discounts. However, in a customer-by- markets for recorded music. customer comparison the Commission found a certain degree of fluctuations and differences Regarding prices, some responses of market between the parties' invoice discounts as well as players stated that online licence fees were quite variations over time and from album to album. The high given the cost savings for the production and market investigation indicated that these fluctua- distribution of the physical carrier and given that tions are mainly the result of so-called ‘campaign no obsolescence costs are incurred. The Commis- discounts’. On the basis of these observations the sion thus further investigated whether there was Commission could therefore not find sufficient any alignment of licence fees. However, it found evidence that invoice discounts have been aligned some differences among the majors in terms of between the parties. prices and rules of usage and therefore concluded that there was not sufficient evidence of an The Commission further assessed whether the existing collective dominant position. Regarding market for recorded music has been sufficiently the possible creation of a collective dominant posi- transparent to enable the majors to monitor each tion on the market for licences for online music, other's pricing behaviour. Whilst the investigation the Commission did not find sufficient evidence indicated a certain degree of transparency with that the reduction from five to four majors would respect to weekly charts and the use of PPDs, it lead to a coordination of prices and usage condi- also showed that some discounts are less trans- tions since these are currently in flux due to the parent. The rather flexible use of campaign developing state of the market. Therefore, the discounts decreased transparency and made the likely creation of collective dominance on this monitoring of any common understanding quite market could not be established. difficult. In addition, market transparency was somewhat reduced by the largely differentiated Concerning the retail market for online music music content, in spite of a certain homogeneity distribution, third parties raised concerns that, as a in the format, pricing and marketing of records. result of the transaction, Sony could obtain a posi- On balance the Commission therefore concluded tion of single dominance on the national markets that there was not sufficiently strong evidence to for online music distribution via its Sony Connect establish an existing collective dominant position music downloading service. These third parties
Number 3 — Autumn 2004 9 Articles feared that Sony could use the joint venture's recording. However, the administration of music content, in combination with Sony's propri- mechanical rights and performance rights, which etary compression/decompression (‘codec’) are the relevant publishing rights at stake, is format and its proprietary digital rights manage- mainly carried out by the collecting societies such ment system (‘DRM’), to foreclose competitors in as GEMA in Germany or SACEM in France. the downstream market for online music distribu- Licences are granted by the collecting societies on tion. However, the investigation revealed that a non-discriminatory basis and royalties are agreed Sony Connect was only launched in some Euro- between collecting societies, publishers, authors pean countries in July 2004 and faces a number of and composers. In light of these facts the Commis- serious actual or imminent competitors such as sion concluded that the creation of the SonyBMG OD2, Apple's iTunes, RealNetworks and joint venture would not be likely to have as its Microsoft. The Commission therefore concluded effect the coordination of the competitive behav- that Sony was unlikely to achieve a position of iour of Sony and BMG's publishing businesses. single dominance in the national markets for online music distribution. Conclusion
Spill-over effects The Sony/BMG case illustrates the different steps Both Sony and BMG continue to be active — in the Commission's competitive analysis which outside SonyBMG — as music publishers, via are required to establish that a concentration would BMG Music Publishing and Sony/ATV Music lead to the creation or strengthening of collective Publishing, a joint venture between Sony and dominance. The Commission carried out a very Michael Jackson. The Commission therefore careful investigation in order to comply with the assessed, on the basis of Article 2 (4) of the EC high standard of proof set by the CFI in its Airtours Merger Regulation, any potential spill-over effects judgement. In the course of the enquiry millions of of the transaction on the upstream markets for data sets were processed in order to analyse the music publishing. Music publishers manage the past pricing behaviour of the five majors. After a rights of authors and composers as opposed to careful analysis the Commission concluded, record companies which sign singers and other however, that the evidence available was not suffi- performing artists. Authors and composers receive ciently strong to prove collective dominance and different kinds of royalties from the various users therefore approved the merger. Nevertheless, the of their lyrics and melodies: ‘mechanical rights’ high degree of concentration in the music industry which are due by record companies for the repro- remains a concern and the Commission will duction of musical works; ‘performance rights’ continue to closely monitor the development of the which are payable by radio and TV broadcasters, music markets. It is noteworthy that any future concert organisers, or discotheques for the public concentration will be assessed under the EC performance of songs; ‘synchronisation rights’ Merger Regulation No 139/2004. which are due for the use of musical works in movies and other audiovisual works; and ‘printing The Sony/BMG case also provides an example of rights’ which are payable by publishers of sheet effective and close EU-U.S. cooperation in the music. It was not necessary for the Commission to field of merger control. It is interesting to note that decide whether the music publishing market the Federal Trade Commission (FTC) had similar should be further segmented on the basis of the concerns and reached the same conclusions as the type of publishing right. Likewise, and in spite of European Commission. When the FTC closed its some indications for national markets, the investigation on 28 July 2004, Commissioner geographical scope of the market could also be left Mozelle Thompson observed: ‘[...] The industry is open. highly concentrated among record labels, and the proposed joint venture will only enhance this In its assessment pursuant to Article 2 (4) of the concentration. [...] I acknowledge, however, that Merger Regulation, the Commission examined the our investigation to date has not unearthed suffi- likelihood of coordination of the competitive cient evidence on which to conclude with reason- behaviour of BMG Music Publishing and Sony/ able certainty that the proposed venture is likely to ATV in music publishing with a view to favouring facilitate coordination in the relevant market in SonyBMG on the downstream market for music violation of the antitrust laws.[...]’ (1).
(1) Statement of Commissioner Mozelle W. Thompson (FTC File No. 041-0054); published on the FTC website: http://www.ftc.gov/ os/caselist/0410054/040728mwtstmnt0410054.pdf.
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