HITS Daily Double


Companies Aren’t Revealing Details, But There're Plenty of Statements and Analysis Anyway
Yesterday: The European Commission sent its official Statement of Objections to the proposed merger of the recorded-music divisions of Sony Music and BMG. Today: The statement is all over the international press, even though nobody seems to know exactly what’s in it.

The statement was issued only to Sony and BMG, and they’re not revealing details, for obvious reasons. Neither wants to aggravate the regulatory body that can make or break their joint-venture deal.

The Wall Street Journal Europe reports that the EC’s concerns are likely centered around pricing issues, while noting that the Sony BMG statement of objections is only 60 pages—not unusually long. The statement of objections is said to be a routine part of EC merger evaluations.

WSJE also reports that people close to the deal say Sony and BMG are likely to argue that music companies no longer have the ability to influence prices the way they once may have been able to, thanks to the growth of mass merchandisers akin to Wal-Mart in Europe. The EC is understood to have requested “reams of historical pricing data” from Sony and BMG.

Regarding the EC objections, BMG parent Bertelsmann said in a statement it "welcomes the clarity this step will give to the debate and remains confident about demonstrating, in addressing the remaining concerns, that the merger will not impede competition."

English paper The Guardian quoted a BMG spokesperson as saying, "We continue to believe that our proposed joint venture is in the best interests of artists, music consumers and employees and will promote robust competition in the music industry."

Meanwhile, AFX News quoted a Sony spokesperson as saying, “The statement of objection is just part of the (EU) administrative process, so we are not panicking about it.” The spokesperson added that the objections do not indicate the EC is leaning toward rejecting the merger.

Sony Music issued the following statement: "In almost all phase II cases, the Commission issues a Statement of Objections. A Statement of Objections is a summary of the issues identified to date by the Commission staff and does not prejudge the outcome of the proceeding. Indeed, the vast majority of transactions that receive Statement of Objections are ultimately cleared. Sony and BMG will now have an opportunity to comment on the Statement of Objections and to adduce additional evidence responsive to the issues raised. We plan on working closely with the European Commission over the next few weeks to respond to the concerns raised by the Statement of Objections. We remain confident that the European Commission will ultimately find that the Sony BMG joint venture is a pro-competitive response to the challenges faced by the recorded music industry."

In its report, the Los Angeles Times said sources familiar with the statement of objections say it asserts that the market share of the combined entity would be too large. If the merger were to go through, 80% of the European music market would be in the hands of four groups—a concern known as the “collective dominance” argument.

The London Times quotes EMI CFO Roger Faxon as saying Sony BMG would create a music group accounting for 25% of all music sales, with a “direct link” to Sony's music-playing electronics its new music download service, Sony Connect. "That situation would retard the development of the digital market because it would place a great deal of control in the hands of one company. That would discourage the drive to interoperability between download services and music players,” Faxon said.

But an analyst at Credit Suisse First Boston tells The Guardian he thinks issues of Internet piracy, competition from DVDs, the discounting power of supermarkets and “the corrosive effect of legitimate internet sites on margins” all argue in favor of the merger. "Given the negative changes in the market which have adversely affected the majors, the big record groups no longer control pricing. The European Union should take a more lenient view and allow the industry to move from five to four majors," media analyst Nick Bertolotti told the paper.

Sony and BMG now have two weeks to make their initial response to the statement of objections, in which they will indicate whether they accept specific issues and what they will do about them. The companies will also provide information on their offer to third parties who have an interest in the case, such as independent record label body Impala.

A hearing will take place a month from now, when Sony and BMG will make their formal response before the EC, according to The Guardian. The commission will then use the remaining time before the July 22 deadline to review the case before making its decision.