16.4.2008   

EN

Official Journal of the European Union

C 94/19

1.

Sony is globally active in music recording and publishing, industrial and consumer electronics, and entertainment. Bertelsmann is an international media company active in music recording, TV and radio production and broadcasting, publishing of books, magazines and newspapers, print and media services, as well as book and music clubs.

2.

The re-notified concentration comprises the creation of the recorded music joint venture Sony BMG which has been completed following the Commission's clearance decision of 19 July 2004. Bertelsmann contributed the worldwide recorded music business of its wholly owned subsidiary Bertelsmann Media Group (‘BMG’); Sony contributed its worldwide — with the exception of Japan — recorded music business which had been operated by Sony Music Entertainment.

3.

On 9 January 2004, the Commission received, pursuant to Article 4 of Regulation (EEC) No 4064/89, the notification of the proposed Sony BMG recorded music joint venture. On 19 July 2004, the Commission declared the concentration compatible with the common market. Bertelsmann and Sony now jointly control Sony BMG which operates as a full function joint venture. According to the notifying parties, implementation of the concentration was gradual and became fully completed in 2006.

4.

On 13 July 2006, the Court of First Instance of the European Communities annulled the Commission's decision (2). On 31 January 2007, the Commission received an up-date of the initial notification. On 1 March 2007, after examination of the notification, the Commission concluded that the notified operation falls within the scope of the Regulation (EEC) No 4064/89 and raised serious doubts as to its compatibility with the Common Market and the functioning of the EEA Agreement.

5.

By decision of 22 March 2007 pursuant to Article 11(5) of Regulation (EEC) No 4064/89, complementary information were requested to the notifying parties. The parties provided the requested information on 26 June 2007, and such re-started the Phase II timetable.

6.

Both parties are active in the discovery and the development of artists (so-called A&R: artist and repertoire) and the subsequent marketing and sale of recorded music. Sony BMG has not engaged in related activities such as music publishing, manufacturing and distribution. Sony's and BMG's activities in these fields remained with the parent companies or have been divested.

7.

The notifying parties consider the relevant product market to be the market for recorded music (i.e. discovery and development of artists, and the promotion, sales and marketing of recorded music) for all types of music. No subdivision along categories (international pop, local pop, classical music and compilations) is considered meaningful.

8.

From a demand side perspective, end-consumers make purchasing decisions based on a number of criteria, among which type of music (genre), international v national, new release v back catalogue, individual artist v compilation, single v album and whether the music is released subject to a promotional campaign. From the supply side, record companies may sign artists and sell records across a range of different genres. Some independent labels, however, specialise in certain specific genres. The market investigation shows that all styles and genres are collectively included in a broad market subject to different musical standards and influences. Most record stores sell a diverse range of music. Moreover, clear and consistent definitions of categories and genres are difficult to find as there are many similarities between all of them (producers, outlets, customers, contract mechanism) which illustrates that distinguishing between different markets is not relevant. As regards compilations, there is a general view that they form a separate market from a demand side perspective, but the suppliers (recording companies) are divided on this issue. Based on these considerations, the Commission concludes that the relevant product market for physical recorded music includes all physical CD albums, irrespectively of their genre or their compilation/single artist status.

9.

Digital music is delivered either online over the Internet or via mobile networks to the consumer in various forms, including downloads (of tracks, albums and master tones), subscription services and streaming. As Sony BMG is mainly active on the wholesale level — licensing its catalogue to digital music providers — the relevant market is the wholesale market for digital licensing of music.

10.

As in previous decisions, the Commission concludes that there is an emerging but separate market for the online delivery of music, including streaming and downloading of music. Whilst digital music services compete to a certain extent with physical sales of music, the market investigation indicated that the physical market is not likely to be more than partly substituted by digital sales. From the final user perspective, digital music can therefore to be considered as a complement to physical music, rather than a substitute. From the supply side point of view, the structure of digital music services is different from physical retail in terms of organisation, as separate divisions for physical and digital music exist at the major record companies in order to handle the distinct value chain of digital music compared to the physical market. Also, the technical and commercial conditions negotiated between digital music services are different from those prevailing in the physical market. Moreover, marketing and cost structure in the digital market differ significantly from the physical market. It can thus be concluded that, both from the demand- and supply side, the wholesale market for licensing of digital (online/mobile) music constitutes a separate market from the wholesale market for physical recorded music. The Commission left open whether mobile music might constitute a distinct product market from online music due to limited demand-substitutability, in particular on the level of end-consumers.

11.

The notifying parties consider music recording to be national in scope, as pricing (including discounts) and the sale of recorded music are predominantly carried out on a national scale. Furthermore, there is a strong local artist demand in all Member States and the discovery and development of new artists is to some extent a local business. The Parties also point out that as only few major customers have an international presence, marketing mainly takes place nationally and the shares of different record companies vary among different Member States. In addition, many independents are only present in one or few Member States.

12.

As in previous decisions, the Commission found that the relevant geographic market has both national and international characteristics. The results from the market investigation still point in the direction of national markets. In particular, national repertoire (i.e. other than Anglo-American repertoire) is typically only attractive to a larger audience in the home country or the countries having the same language, the pricing, as also submitted by the notifying parties, is different from country to country, and the marketing is done on a national basis. Based on these considerations, the Commission concludes that the relevant product market for physical recorded music is national.

13.

The geographic scope of digital distribution of music could be considered larger than national as the internet does not recognise borders and allows music to be available to consumers ‘anytime, anyplace, and anywhere’. However, the market investigation has indicated — in line with the 2004 Decision — that the market is still national in scope. On the wholesale level, licences are mostly granted by the record companies to music online providers for exploitation in a certain (national) territory. On the retail level, the market investigation has indicated differences in the structure, demand, evolution and dynamics of the digital market between the relevant Member States that would support the finding of national markets. The market for licensing of digital music can therefore be considered as national in scope.

14.

Whilst the recorded music industry was already concentrated prior to the merger in 2004, Sony BMG's market shares remain below a level that could generally be considered as constituting a single dominant position in any of the national markets. Also, the merger has not led to competitive issues with regard to market foreclosure of digital music retailers, portable music player manufacturers or independent record companies. Specifically with regard to the independents, the digital market can be considered as representing an opportunity for independents to reach demand without having to rely on distribution and traditional retailers.

15.

The market investigation focussed on whether the concentration has led to a creation or strengthening of a collective dominant position on the wholesale market for licensing of music to digital music providers. As online/mobile music providers need to have licences with all majors in order to be able to offer a repertoire as complete as possible, the question investigated is whether the Sony BMG merger could, in an already concentrated market, be seen to have enabled or significantly facilitated the majors to collectively dominate the wholesale licensing in the digital music market.

16.

Tacit collusion would generally be considered to be incompatible with the dynamic and unstable nature that characterises the digital market. The development of the digital market is uncertain as the business models are diverse and evolving. Whilst the digital market attracts frequent new entry, demand is highly concentrated as Apple's online music service iTunes is the leading digital music retailer in all national markets, and such provides iTunes with a certain degree of countervailing buyer power. The pricing strategy that iTunes has introduced in the digital market — and which has been replicated by most of the other music service providers — is to sell all music at a standard price per track and such significantly limits the ability of the majors to differentiate their pricing at the wholesale level.

17.

The market investigation has verified whether the conditions for a finding of collective dominance are met in the digital music market.

18.

The investigation has considered, in particular, if the predominant retail pricing model can be seen to provide a direct or indirect focal point for the majors to coordinate around. As to the ability for majors to monitor adherence to any such terms of coordination, it has been investigated to what extent the majors have aligned price levels in their contracts with digital music providers and, where a certain degree of wholesale price alignment could be observed, whether such was the likely result of coordination or rather of competitive factors such as the bargaining power of large digital retailers or of the nascent state of the digital markets. It appears from the Commission's investigation that the majors seek to individually maximise their returns on digital music. The majors apply different prices, different price structures and use different business models, and this differentiation is increasing.

19.

It appears from the investigation that wholesale pricing structures and agreements have increasingly gained in diversity and complexity over the past 36 months. This increased complexity follows from the dynamics of negotiation between the majors and the digital retailers, leading to more customised contracts that reflect the market position of the retailer and the valuation of the service it provides. These price structures are also more frequently reviewed and renegotiated. Furthermore, there is increasingly more sophisticated differentiation between categories of content. Also, there is an increased differentiation between the contracts concluded with digital retailers on the national level as the local management of the majors in a given Member State obtains more influence in negotiating the contracts. More precisely, the market investigation has pointed to a number of elements that would considerably limit the ability of the majors to identify deviation regarding any tacitly coordinated wholesale pricing on the basis of such observed retail prices. Overall, there is a tendency towards increased wholesale price sophistication such as (i) discounts and volume related prices; (ii) a two tier pricing system; (iii) advance payments; (iv) usage restriction variations; (v) bundled content.

20.

Quite apart from these features, it was investigated whether the observed level of price alignment is in itself sufficient to consider the online market segment transparent. Through an analysis of the major's historic price data and contracts with digital music retailers, the Commission has assessed to what extent the majors apply aligned price levels in their contracts with digital music providers in the investigated 15 Member States. This investigation provides information on the level of transparency and the evolution of price structures, possible alignment between the majors in terms of price and other contractual conditions, and to what extent the merger has affected these contractual conditions.

21.

With regard to the different market segments, price variability is most pronounced for subscription services, streaming, tethered downloads and advertising based music services for which a wide variety of business models have developed. For these applications, wholesale pricing and other contractual conditions are not transparent and there is no alignment between the majors. There is also very significant price variability for mobile applications (master tones, mobile downloaded tracks and videos). There is no overall convergence of the major's pricing levels as most majors apply different rates to the different mobile music providers within the same country. Secondly, on the level of the individual mobile music provider, most majors apply considerably different prices. Thirdly, prices are increasingly differentiated on the basis of the volumes sold.

22.

For online downloads there is a high degree of price differentiation for premium/mid price single tracks and albums. For standard downloads (tracks and albums), three categories of retailers with varying levels of price variability were identified. For the majority of the digital music providers in all assessed Member States, there is a relatively wide divergence on wholesale prices applied to a given music service provider and these differences can fluctuate over time. For a second category of music service providers, there is a more pronounced level of price similarity, whereby the currently applied wholesale prices show divergence of between 10 % and 15 %. Also, for these music service providers, the ranges of price alignment vary considerably between the different providers in all assessed Member States. There is no consistency in the price level applied by the different majors for a given retailer; and these positions may vary over time, whereby the most expensive major for a given music service provider becomes the least expensive for that provider over a period of 24 months. Such findings are hardly compatible with a theory of tacit collusion.

23.

Some price alignment can be observed for the iTunes music service. Whilst certain of the majors endeavoured to persuade Apple to accept differentiated prices (in order to increase prices for releases with high demand and vice versa) when launching iTunes in Europe, Apple has reportedly refused to abandon its ‘one price fits all’ pricing policy. In view of the very strong demand position iTunes has acquired (with, for example, more than 80 % of one of the major's 2006 online download revenues in the United Kingdom, Ireland, Austria and Belgium), the negotiation power of iTunes appears to have a strong influence on prices. In addition, in the United Kingdom, which is the most advanced digital market in the EEA, iTunes UK applies the same ‘one price fits all’ retail pricing structure (albeit at a higher price than in the euro zone), while certain of the majors apply wholesale prices that are significantly different from other majors. It cannot be explained under an agreed collusive scheme why some majors would accept to apply a lower wholesale price than the other majors, in particular seen that these price differences were maintained by those majors that have entered into new contracts with iTunes.

24.

The second condition for a finding of collective dominance requires that there is some form of deterrent mechanism in case of deviations. The market investigation has not pointed to the existence of a credible retaliation mechanism that would force the majors to remain within the boundaries of any agreed collusive scheme. The fact that the wholesale prices of the majors can vary considerably in opposite directions without any observable reaction of the other majors is not indicative of a transparent market where deviation is easily detected and retaliation can take place to reinstate adherence to the tacit collusion. In addition, the different majors have in the past 12 months, if anything, applied more divergent short and long term strategies than in the past. The investigation has not brought evidence that could explain how such unilateral actions from certain majors would be compatible with a collusive scheme, or why these actions, that affect an important part of the digital market, would be left without retaliation.

25.

For coordination to be sustainable, the reaction of outsiders — such as current and future competitors not participating in the coordination, as well as customers — should not lead to jeopardising the results expected from the coordination. As for potential competitors, Independents exert only limited competitive pressure on the majors. As for customers, iTunes has acquired a relatively strong bargaining position vis-à-vis the majors as far as online downloads are concerned (and has successfully objected to any wholesale price differentiation for single track). On the other hand, the market investigation clearly indicates that a digital music provider must have access to the repertoire of all the majors in order to match the demand for chart hits. As there is no substitution for chart material, this dependency affects the countervailing buyer power of music service providers.

26.

It can be concluded that there is a balance of power between the majors being able to leverage their indispensable content and iTunes (and increasingly a number of strong players such as telecom operators). Taking into account that the degree of buyer power is still significantly more important than what can be observed in the physical market the customers in the digital market could indeed jeopardise to a certain extent the benefits that any coordination could bring to the majors.

27.

Whilst the merger has reduced the number of competitive relationships, the market investigation has not provided evidence that the merger has enabled or facilitated tacit coordination. In addition, the contract and price data show that the merger has not led to an overall increase of wholesale prices for BMG or Sony content.

28.

On the basis of all the above, the merger has neither led nor will lead to the creation or strengthening of a collective dominant position of the four remaining majors in the markets for licences for digital music in any of the EEA countries, as a result of which effective competition would be significantly impeded in the common market or in a substantial part of it.

29.

The markets for recorded music in all affected countries are characterised by the presence of four major record companies (Sony BMG, Universal Music Group, Warner Music Group, and EMI) which together hold 80 % of the market, and a large number of significantly smaller independent record companies. Universal leads before Sony BMG, EMI and Warner. The market share of Sony BMG does not allow the company to reach a single dominant position in any relevant market.

30.

The following theories of coordination that suggest that major record companies might restrict the access of independent record companies to retailers on non-price aspects of the market for recorded music have been analysed and rejected. Moreover, it is not obvious that these topics would restrict competition between majors themselves.

—   Access to shelf-space: The market investigation confirmed that hits released by independent record companies benefit from similar conditions as hits from major companies. Shelf space is allocated independently by retailers, on the basis of their own evaluation of albums sales potential.

—   Access to airplay: Most successful radios in Europe broadcast music on the basis of a playlist. All record companies compete to be registered on such playlists as regular airplay is one of the factors supporting sales. Most competitors reported that TV or radio stations, in their decisions on the allocation of air-time to music titles did not particularly favour recording companies belonging to their group. Finally, the percentage of combined airplay for independent record companies increased in 10 out of the 15 EEA countries analysed during the 2003-2005 period.

—   Charts rules: Whereas the existence of charts can indeed increase transparency by providing regular information to all market observers on how CDs albums of competitors perform, the Commission investigation did not find any instances of majors using chart rules as an opportunity to deny the access of artists from independent record companies to the charts. In addition, the Commission notes that minimum prices do exist in 12 countries for CD albums to enter the charts, but consider that these prices are too low to hinder competition between record companies on setting different prices and/or constituting focal points for a coordinated approach by majors.

—   Release dates: Sony BMG has recognised that decisions on its albums' release dates are influenced by release dates of competitors' albums. Release dates are also often publicised and therefore transparent or relate to specific events (e.g. Christmas sales). However, release dates are often postponed and in any event, the behaviour of majors in this regard can hardly be qualified as collusion and seems more based on competition, with each firm trying to optimise its release dates.

—   Publishing and recording rights: All majors have a sister company active in music publishing, apart from Sony BMG, since Bertelsmann sold in 2007 its publishing division to Universal. Sony/ATV, a publishing joint venture between Sony and Michael Jackson, reaches a significantly lower market share than its competitors. Moreover, the Commission investigation concluded that because of the existence of collecting societies, publishing companies are not in a position to exercise market power in the market for recorded music.

—   Cultural diversity: The market investigation showed that all record companies are engaged in intense competition for discovering and signing new artists. Major record companies have reduced the number of artists on their roster, but this decrease followed the drastic decline in demand and started before the merger of Sony and BMG. The share of local artists in record sales has significantly increased in the majority of Contracting Parties to the EEA Agreement in the past few years. The increased share of local artists is retailed through both traditional retail channels and the internet, with the latter acting as a forum for known and unknown artists increasingly to display and sell their music directly to end-customers without the use of traditional retail channels. It can thus be concluded that the merger of Sony and BMG had no negative impact on cultural diversity at the level of creation, recording, distribution and retail.

31.

The following theories of coordination that, if applicable, would suggest that major record companies coordinate to stabilise the net wholesale prices of physical CD albums at supra-competitive prices have been analysed and rejected.

32.

It has been suggested to the Commission that the yearly budgets of majors would be used as focal points of coordination for them to control the average annual discounts of their competitors or as a signal to all retailers (and through them to all competitors) that the tacit coordination that was taking place for a given year, would be re-conducted for another subsequent year.

33.

The Commission found that budgets are not prepared for separate customers on a regular basis by record companies. Retailers notably reported that they are not informed of record companies' total discount budgets allocated to them. The Commission also found that the budgets prepared by record companies are confidential documents and the investigation did not provide any evidence that these budgets are disseminated between the majors or that they otherwise could be used as focal points for coordination. In addition, the Commission considers that whereas budgets are instruments to forecast sales and discounts, they are poorly appropriated for controlling discounts granted to customers on a regular (e.g. monthly, weekly) basis. Finally, due to uncertainty of e.g. sales forecast, monthly budgets are often ‘over-spent’ and the Commission did not find indications of either reduced availability of discounts towards the end of budget periods or retaliation following the observed and regular deviation from budgets, neither of which is consistent with a theory of tacit collusion.

34.

Under the theory that collusion takes place at the level of each title, thousands of albums of competitors would need to be monitored by majors at any point in time. The market investigation found that whilst it may be feasible for majors to collect information on a few specific albums by focusing discussion with retailers, it seems very unlikely that record companies could obtain exhaustive and precise information on the pricing of all their competitors' albums, or even on all their chart albums. The market investigation has also not supported the finding that majors actually attempt to collect such information on anything close to a systematic basis. In addition, PPDs, campaign discounts and retail prices evolve constantly and would require a daily or at least weekly monitoring leading to a massive set of information elements to be gathered. Such a database would be highly cost-consuming, whilst remaining in all likelihood largely incomplete.

35.

A theory of harm has been suggested to the Commission whereby all major record companies coordinate themselves at the level of their general pricing policy. This would notably imply that all majors follow the same pricing patterns, involving a level of flexibility necessary to adapt album prices to fluctuations in demand. Under this theory, majors would enjoy a stable and predictable business framework in the sense that pricing for comparable new releases or for comparable catalogue titles would be relatively similar. It would also be a guarantee that the evolution of prices of albums would follow similar rules. A deviation from the general pricing policy would be spotted by competitors as soon as it is systematic and applies to a large category of albums.

36.

The Commission believes that it is inappropriate to qualify the above theory as one of coordinated effects on the market for recorded music, notably because such a theory would leave significant margin for different majors to develop many alternative pricing schemes and thus cannot be distinguished from competition.

37.

The bulk of sales of majors are realized by chart albums during the first weeks after release. Hence, a coordination of majors covering chart album prices during the early post-release period would cover a significant part of majors' activity and revenue. The analysis first conducted at the general level, including all affected markets, has pointed to a number of weaknesses of this theory which would be hardly compatible with tacit collusion. The possible terms of coordination would notably have to address at least the following issues:

38.

In addition, in order to prove a collective dominant position, the coordination would need to meet the Airtours criteria: sufficient transparency to spot deviations, existence of a credible retaliation mechanism and inability of customers or competitors to jeopardize collusion.

39.

PPDs are only partially transparent and the Commission found that they are not systematically monitored by the majors. In most countries, PPDs are not publicly available anymore. They are printed in promotional material distributed to retailers. These retailers could in theory share such material with other record companies but the market investigation did not provide evidence of any systematic resort to such practices. In some countries, PPDs or PPD codes are also available via websites accessible by record companies and retailers. The parties, however, submitted that they do not use such websites. Nevertheless many retailers acknowledged that they partly use pricing information from one major to negotiate with other majors. As a result, although it seems possible for Sony BMG to collect PPD information through contacts with retailers, the information that could be gathered in this way would likely be incomplete and its reliability would be dubious. It cannot therefore be concluded that PPDs can be reliable focal point for a theory of coordination.

40.

Discounts are even less transparent. They are negotiated directly by each major with each customer on a bilateral basis. Although retailers use commercial information from one major to negotiate with its competitors, the majority of retailers acknowledge that majors do not know each other's discounts. Contracts signed between the majors and retailers generally contain different clauses in terms of discount structure and discount rates. It could be argued that file discounts granted to customers are very stable year on year and might be more easily observable. Nevertheless the Commission investigation also found it was not possible to derive any recurrent predictable pattern for the way in which the different majors apply campaign discounts and campaign discount levels to different retailers (for new albums as well as for mature catalogue albums). In addition, these campaign discounts are only partly observable at the retail level as campaign discounts can aim at pushing retailers to build stock or to grant better visibility to albums. They are not systematically passed on to final consumers and as such are not systematically observable with regard to their application. They are even less observable with regard to their magnitude. It can be concluded that the limited transparency of discounts renders any monitoring of a tacit coordination very difficult.

41.

With regard to the possibility to reverse-engineer the net wholesale price of CD albums from their retail prices, the market investigation showed that after the release of a new album, the retailer mark-ups are impacted by a variety of factors and are therefore not regular. Even for new releases, where mark-ups applied by retailers are more stable, the investigation showed that the level of transparency would not allow deducing the net wholesale prices of competitors' albums with a sufficient precision. This implies that reverse-engineering is very difficult for albums in general, as confirmed by a majority of retailers.

42.

In conclusion, the investigation indicates that the level of transparency that characterises PPDs, discounts and mark-ups applied to retail prices does not allow verifying that the other majors are respecting any commonly agreed pricing policy for all albums, or even during the period after initial release.

43.

The only two forms of retaliation that have been proposed to the Commission are either the exclusion of the deviating company from compilation joint ventures or other joint activities, and second the termination of the tacitly coordinated behaviour with respect to prices and releases of albums. The Commission did not identify in any affected country any action that could be considered as retaliation via exclusion of compilation deals or as activities that were intended as retaliating returns to competitive behaviour. Although the threat to apply a credible retaliation mechanism can constitute a sufficient deterrent mechanism, the absence of such observations in circumstances where there has been no observable alignment consistent with terms of coordination confirms that such mechanisms would not constitute credible means of retaliation.

44.

It appears that independent record companies are unlikely to be able to effectively react and jeopardise the expected outcome from any coordinated behaviour between majors. On the other hand, there seems to be enough, and increasing, scope for at least a sizeable proportion of customers to be able to destabilise coordination by majors by reducing purchases and advertising on their products. It is therefore unlikely that coordination (which the Commission found no indication of in the market investigation) could be sustained under such circumstances.

45.

In conclusion, the market investigation did not find evidence regarding coordination at the level of the selection of PPDs. The analysis of the discount stability suggests, even under the assumption of full transparency of PPDs, that most of the time a significant number of sales transactions do not follow a simple and stable discount pattern that could be inferred by a knowledgeable market participant based on public information. PPDs are only partially transparent, and there are indications that it is not possible to reverse engineer net wholesale prices from retail prices with the necessary level of certainty.

46.

The Commission investigation established that the merger has neither led nor will lead to the creation or strengthening of a collective dominant position of the four remaining majors in the markets for the physical recording of music in any of the EEA countries, as a result of which effective competition would be significantly impeded in the common market or in a substantial part of it.

47.

The decision concludes that the proposed concentration will not significantly impede effective competition, by creating or strengthening a dominant position, in the Common Market or in a substantial part of it. Consequently, the concentration is declared compatible with the Common Market and the EEA Agreement, in accordance with Article 8(2) of the Regulation (EEC) No 4064/89 and Article 57 of the EEA Agreement.