The decision by the European court to annul the Sony-BMG tie up is a slap in the face for the European Commission which has struggled to get it right on music.
Brussels' clearance of the merger of Sony and BMG's music businesses two years ago came as a surprise after antitrust officials had expressed reservations about its effect on competition. After all, the EU had blocked a similar combination of EMI and Warner Music four years earlier. It seems that in July 2004, Sony and BMG managed to explain away any deterrent effect their merger would have on competition in the recorded music industry. The tie-up left 80% of the recorded music business in the hands of four companies - Sony-BMG, Vivendi, EMI and Warner Music.
When Brussels prepared its arguments against the EMI-Warner Music tie up in 2000, it suggested that a reduction in the number of companies operating in the business from five to four would lead to collective dominance of the market by a handful of operators. This would restrict competition and make it much harder for independent rivals to gain a foothold. Many in the industry could not understand what had happened in the intervening four years to convince the Commission that this would not happen when Sony and Bertelsmann put their music arms together. It could be that the EU's antitrust officials had suffered a series of blows and legal challenges to some of their competition theories and they were feeling less robust.
The independent record labels complained to the European court about the Commission's decision on Sony-BMG. The court has today agreed with them that the EU's antitrust body failed to demonstrate to the required legal standard that collective dominance would not exist after the merger. Collective dominance is in any case, a difficult concept to prove. It is a controversial antitrust theory pursued by Brussels that suggests companies could effectively act together - albeit unconsciously.
While all this is intriguing to competition lawyers and antitrust anoraks, it has less bearing on what is happening in the real world. As any teenager knows, buying a CD is a thing of the past. Digital downloads have rapidly encroached on the market for CDs and DVDs, undermining the music companies' profit margins. Their very existence could even be challenged by bands releasing their music straight to the internet. This is why the music companies so desperately want to get together and why it is doubtful that the market can continue to support even four companies. EMI and Warner Music are again at the negotiating table about some combination and today's ruling has cast a large shadow over that.
It is unclear what will happen now to Sony and BMG. They will have to submit their merger to the EU authorities again, who could force them to unpick it, or more likely sell-off part of their business to rivals. They are likely, of course, to appeal against the ruling. Independent record labels say they want some conditions imposed on the big four that makes the market operate more fairly. But what the music industry really needs right now is innovation and a new business model. The more companies are tied up answering arcane legal and competition issues, the less time they have to spend on securing a future for recorded music.
