SONY/BMG MERGER - IMPALA BACKGROUND NOTE
The story so far…
The EU first assessed the Sony/BMG merger in 2004. It decided to authorise the merger without remedies despite concerns about its impact on competition. That move was also inconsistent with previous music market assessments (for example, EMI/Warner) which showed clearly that the music market could not tolerate further concentration without remedies. This approval was set aside by the European Court of First Instance (CFI) in June 2006, following a class appeal by IMPALA on behalf of thousands of music companies and artists – the first such appeal of its kind.
The European judges found that the Commission had ignored overwhelming evidence that competition would be severely damaged by Sony/BMG and had made an unexplained u-turn when it walked away from the serious objections that it had previously highlighted. It is this 2006 judgement of the CFI which is being appealed.
The SonyBMG merger was also renotified to the Commission who once again issued a second approval decision without remedies in October.
Inconsistencies
This second SonyBMG decision is wholly inconsistent with previous Commission and Court decisions.
- In 2000 the Commission insisted that remedies were required to counteract the anti-competitive impact of the proposed EMI and Warner (leading to both parties walking away from the merger).
- In 2004 the Commission raised serious concerns about the merger of Sony and BMG only to later ignore them in an unexplained last minute “u-turn”, approving the merger without remedies.
- The European Court in 2006 found that market was clearly identified by the court as suffering from the majors’ dominance and co-ordination. The court also identified 8 points that make music very transparent and easy to co-ordinate prices and other competitive behaviour. How can the market be so different two years on?
- In SonyBMG, the Commission examined on-line in detail and concluded that there were no problems, yet a few moths before, it concluded in the Apple case that the majors’ conduct does pose competition problems in the online music market.
- SonyBMG was approved without remedies, yet just a few months previously, the Commission had concluded that another merger in music could not be approved without remedies – this time in Universal/BMG Music Publishing.
In light of all of this it seems implausible that the Commission could justifiably conclude that the Sony/BMG merger required no remedies.
Earlier this year IMPALA had offered to work on remedies and called on the Commission and the majors to work together with the independents towards market recovery through broad and constructive remedies, such as those already agreed with Warner Music Group.
The fact that the majors have been able to operate since 2004 without any system of market recovery or remedies in place has exacerbated the market decline. If the Commission had at least addressed the issues promptly following the judgement, we would have already saved time. They should have done so within five or 6 months but instead delays meant that 15 months lapsed after judgement and new decision, during which time the market declined significantly. The additional 10 month delay since July 2006 has cost the industry at least 10% when it should have been working together to develop new markets and tackle the challenges of on-line innovatively to grow the market instead of concentrating it even more in the hands of the majors. The resultant level of concentration shows a market which is becoming one of the most closed in Europe.
The music market
Market concentration has been an increasing feature of the music market. The impact of this is to make it easier and easier to marginalise the small players who face considerable market access barriers to entry and growth (increased costs of marketing and competing with the majors to sign artists; difficulty of getting into retail, on radio, tv, print media etc). the gap between the majors and the independents is now so wide (see below) that now an independent could never grow to become the size of a major. In addition, there have been no new independent market entrants.
Twenty years ago, the market was completely different. It was balanced by an array of big independents who competed effectively with the majors because they had scale.
Waves of consolidation have reduced music’s competitiveness as well as consumer choice and cultural diversity. Now over 95% of what most citizens hear on the radio and see on television or on the internet is controlled by four companies.
The Sony BMG merger has also comforted the development of a duopoly with SonyBMG and Universal. This has made it harder for independents to promote new artists. The market share figures speak volumes. These two companies alone have over 50% of the total market and 70% of the vital Top 100 in many key EU territories (EC’s own market share analysis in UniBMG). Even the “mini majors” EMI and Warner no longer have critical mass - they only have 10% and 14% respectively of the national Top 100s. Their market share has plummeted in two years. As for the other competitors, no independent has even 1.5%. In the last twelve months alone, many of the biggest European independents have been bought up by Universal, from Vale Music in Spain, ARS in Belgium, Magic in Poland, Lionheart in Sweden, to Rounder Records, Sanctuary and now V2 in the UK. Universal is the worlds biggest music recording and publishing company controlling nearly half of the world’s most popular repertoire. Its recording market share in hits at national level across Europe is currently as high as 40% in some territories.
The squeeze on the remaining independents is compounded by the loss of these big players which in many territories has reduced the power of the independents to counter the majors’ dominance by at least one third.
It is vital that this trend is reversed given the crucial role the independents play in terms of innovation and employement. At the moment SMEs in the music sector create more jobs than the majors and represent 99% of the actors in the market as well as 80% of the innovation in the sector. As in other sectors, it is the SMEs in music that drive creativity and innovation. There is no issue competing if they have the same chance as the big companies. The problem lies where the playing field is not level due to severe market access problems created by over concentration in a cultural industry. With some action from the regulators, the independents would also be able to effectively contribute to a properly competitive and diverse market.
EC policy and rules
The Commission’s stance in music is inconsistent with its approach in other markets and also with its general policy with regard to SMEs and promoting creativity and innovation, as well as its obligation to consider cultural diversity.
In competition policy terms, other problem markets, such as energy have been given Commissioner Kroes’ full attention. This is ironic, considering that the market share figures show music to be a market which is more marginalised and closed than energy. IMPALA has requested the Commission to review the whole sector.
Regarding SMEs, all the European Heads of State called on the Commission in May to ensure that there is proper support for small operators in the creative sector because this is essential to Europe's innovation and growth. They highlighted this as key to the Lisbon agenda. By agreeing to more and more concentration without any remedies, the Commission is reducing the SMEs ability to access the market and compete. They cannot continue to innovate if they can’t get to market.
At the EU Cultural Forum in September, the importance of the creative industries and the fundamental role of SMEs in promoting innovation was again underlined. Market concentration was identified as a key issue for creative SMEs, along with under-capitalisation. The Cultural Forum was hosted by the Portuguese Presidency in Lisbon and was attended by the EU President Barroso and Culture Commissioner Jan Figel.
In terms of cultural diversity Article 151 (4) of the EC Treaty obliges the Commission to take cultural diversity into account in ALL decisions. In March this year, the UNESCO Convention came into force in Europe and the rest of the world. One of its basic principles is that “cultural diversity is needs diversity of artistic creation and production. Another is the need for equitable access to the means of creation and production. This Convention will now need to be implemented by the EU and other countries which are signatory.
At the same time, the EC is currently working on an “Agenda for Culture” to make sure that creative industries are properly supported and that culture is effectively mainstreamed into all key policy areas. The main issue for SMEs is to make sure they are are free to realise their creative and commercial potential on behalf of artists and other music makers in Europe. This translates into a need for a fundamental rethink and concrete action on market access, competition, innovation, entrepreneurship and fiscal policies.
Next steps
As far as the court case is concerned, the Advocate General is expected to deliver an opinion on 13 December. The judgement usually follows several months later. There may however be a speedy response on the issue of legal interest which could accelerate the case, which is already advancing more quickly than the average case.
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