Top executives from Sony Music and BMG will take center stage in Brussels this week for the European Commission's oral hearing on the proposed merger of the companies.

BRUSSELS -- Top executives from Sony Music and BMG will take center stage in Brussels this week for the European Commission's oral hearing on the proposed merger of the companies.

The June 14-15 hearing with the EC's competition department is one of the final and crucial stages in the merger process.

During the closed-door hearing, the execs are expected to counter accusations of price-fixing, market collusion and collective dominance that the EC claims are already prevalent in the music market.

Other interested parties, such as European independent labels trade body Impala, are also expected to present their views on the merger during the hearing.

As an executive at one of the companies involved says, "It will be our job to convince (the EC) that we have a sound case."

The EC -- the European Union's executive authority -- last month sent Sony and BMG a preliminary report, the Statement of Objections (SO), on the proposed merger.

The most serious charge in the document, an edited copy of which was obtained by ELW, relates to price collusion between the majors, described in the SO as "parallelism."

"The Commission considers that the majors have been coordinating on the prices of a large part of their sales," the SO says.

The statement says that the majors' pricing policies are coordinated through an alignment of the published price to dealer (PPDs) of hit CD albums. "The Commission found it extremely easy for majors to monitor those PPDs at which new expected hit albums are released because those PPDs are publicly available in the major's catalogs," it says.

The EC considered that "there is sufficient evidence that majors are aware of each other's commercial terms."

The EC accepts that the existence of list prices "is not in itself indicative of collusion," but the data collected for the SO indicates that they have been used in a manner that is suggestive of "coordination."

Sony and BMG say the existence of discounts shows that there is no collusion. But the Commission says this does not significantly alter prices: discounts vary but are broadly stable over time, the EC says, and they tend to stay within the 5% limit.

The EC notes that "most majors have left real prices practically unchanged in the face of a falling demand." It adds, "In the light of this remarkable stickiness of prices over the years in the face of a changing market environment, and given the many aspects of the market that are conducive to cooperation, the Commission is of the opinion that the pricing policies adopted and particularly the decisions to stabilize prices during the years examined were the result of coordinated action."

Overall, it is the entire structure of the music market that the SO criticizes, saying it is endemically "conducive to coordination."

The SO identifies a number of factors that allegedly facilitate coordination. Among these are product homogeneity in format and use; a limited number of relevant price points (PPDs); a limited number of relevant albums; the weekly publication of charts; the stability of the customer base; and the relative stability of market shares over time. Also, the SO points to the high number of multi-market contracts due to the vertical integration of the majors; numerous structural links between majors, such as joint ventures for compilations, and licensing and distribution agreements; common membership in industry associations; and common negotiations of royalty rates.

The SO concludes: "Sony and BMG would significantly enhance a situation of collective dominance in which the majors try to align their pricing policies."

The 51-page SO devotes relatively little attention to the vertical integration from possible tie-ups between the merged Sony BMG and Bertelsmann's TV arm RTL Group or Sony's online services. There are just three pages devoted to vertical concerns on online music distribution. Of music publishing, the SO says it is likely a merger "would appreciably restrict competition."

The EC also warns of "the proposed merger strengthens a position of collective dominance of the majors in the wholesale market for online music." The SO says it is extremely difficult, if not impossible, to operate an online service without the repertoire of all major record companies. And it says, with the imminent launch of Sony Connect in the EU, there is a risk that Sony could use its position in the joint venture to deny competitors access to its library, or that it could discriminate against rivals via usage rules, release dates or download formats.

"The Commission has come to the preliminary view that the notified concentration is incompatible with the common market," the SO concludes. "It would strengthen a collective dominant position in the market for recorded music and in the wholesale market for licenses for online music, as a result of which effective competition would be significantly impeded."

The powerful indictment against the merger recalls the EC's response four years ago, when its fierce SO on the planned EMI-Warner merger forced those companies to call off their venture.

But one Brussels-based lawyer involved in the music business says he is not surprised at how much is in the SO. "It is only natural for the Commission to throw in the kitchen sink, including every possible argument that might emerge on the merger," he says.