EU Court Nixes Sony, Bertelsmann Music Merger

An EU court on Thursday overturned the European Commission's approval of a merger between the music units of media giants Sony (SNE) and Bertelsmann AG that created the world's second-largest record label.

This forces Sony and BMG to ask the EU to clear the deal again based on current market conditions, said EU spokesman Jonathan Todd. However, Sony BMG said it did not believe the judgment undermined its business.

The Court of First Instance — the EU's second-highest court — backed a challenge by the independent record label group Impala, saying regulators did not properly show in 2004 that the new company would not have a monopoly position in two ways. Either one would be enough to strike down regulatory approval.

"The Commission did not demonstrate to the requisite legal standard either the nonexistence of a collective dominant position before the concentration or the absence of a risk that such a position would be created as a result of the concentration," a court statement said.

Todd said Sony and BMG will have resubmit their applications for antitrust clearance. "We will study the ruling carefully, but it is clear that we will have to re-examine the merger," he said.

Sony BMG said it would discuss next steps with the Commission. "Today's judgment does not affect the validity of the Sony BMG joint venture, which has been up and running since August 2004," Guetersloh-based Bertelsmann said in a statement.

The European Commission had unconditionally approved the 50-50 joint venture between Japan's Sony Music and BMG, the German media giant's music unit, in July 2004 after finding insufficient evidence the deal would harm consumers.

The deal brought Sony artists like Aerosmith, George Michael and Barbra Streisand and BMG's Avril Lavigne and Elvis Presley under one roof. It also reduced the number of music "majors" from five to four. Sony and BMG argued they needed to join forces to deal with declining CD sales and the threat from illegal downloading on the Internet.

Regulators had assumed that there was no record industry monopoly because there were a wide variety of products on the market and the absence of open disputes between the five largest companies.

But the court found they did not properly support a theory that promotional discounts ultimately prevent a monopoly occurring.

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

It also said regulators were wrong to rely on the absence of evidence that record companies had used retaliatory measures in the past. The court said that it found proof of "effective deterrent mechanisms" such as the possibility of hurting an errant record company by excluding it from compilations.

It also criticized both the Commission and Impala for their conduct during the court case. Impala's actions had slowed down the case, it said, ordering it to bear one quarter of its own costs.

Universal Music holds the top Music spot in Europe, with Sony-BMG pulling ahead in the United States. The rivals control about a quarter each of the $32 billion global music market. The other two majors are EMI and Warner Music (WMG), with about 30 percent of the global market between them.

Four years ago, EMI and Warner scrapped a proposed hookup in the face of EU charges that fewer majors could reduce competition and lead to higher prices and less choice for consumers. The two have recently been locked in a takeover stalemate as each has rejected offers from the other.

Sony operates a new music-downloading service called Sony Connect, while Bertelsmann's RTL TV and radio group operates in Germany, France, Belgium, Luxembourg and the Netherlands.

There were worries that they could hamper competitors by restricting access to their stable of talent.