Now that the European Commission on July 19 cleared the proposed merger of Sony Music and BMG, approval by the U.S. Federal Trade Commission is the final hurdle before the deal's completion. <br clear






Breaking News

Music Biz Ponders Sony BMG Structure After EC OKs Merger

By Emmanuel Legrand and Wolfgang Spahr

Rolf Schmidt-HoltzNow that the European Commission on July 19 cleared the proposed merger of Sony Music and BMG, approval by the U.S. Federal Trade Commission is the final hurdle before the deal's completion. (For more on the EC's approval of the deal, please see the Commentary.)

The FTC's rubber-stamping of the merger is thought to be imminent, and the music industry's new lineup of four global majors appears ready to become a reality.

Upon completion of the merger, Sony BMG will be the world's second-largest record company.

Its global market share will be about 22.6%, according to UBS Warburg. Global leader Universal Music Group has 23.5%, according to the International Federation of the Phonographic Industry.

Industry attention is now focused on how Sony and BMG will merge their structures.

BMG chairman Rolf Schmidt-Holtz says it will take "at least a year to complete the merger."

The top management structure for Sony BMG has already been announced. Schmidt-Holtz will be chairman; current Sony Music chairman/CEO Andrew Lack will be CEO. BMG COO Michael Smellie will hold a similar role at the new company, as will Sony Music CFO Kevin Kelleher.

Both BMG and Sony declined to comment on talk that the merger would result in the loss of 2,000 jobs.

"When two large companies join forces, they do this because they want to cut costs and must do so," says Schmidt-Holtz. "These are costs which do not benefit the consumer and music. We will do this as well, because we have no other choice. It is also what we told the Commission."

Still, he says, Sony BMG will achieve efficiencies that will benefit its artists.

"Fewer one-hit wonders and more creative quality -- this is an opportunity for the record industry as a whole," Schmidt-Holtz says. "The point is to channel investment back into music once more. The merger is good for music, for our artists and for our employees. Ultimately, it is the best concept for ensuring both companies' continued existence."

Because the Sony-BMG match is essentially a merger of equals, there will be discussions between the two parties as to how to create the best structure at global, regional and local levels. This will be different from the last merger of two music majors, PolyGram and Universal, in which the buyer, Universal, called the shots.

Many speculate that much will be done in the next four to six months.

"To focus on efficiencies and deliver the savings they announced, they will have to act fairly quickly, especially in the main territories such as the U.S., the U.K., Germany and France," one observer says. "And this will also have a devastating effect on the artist roster."

The international structure of the combined company is a key issue.

Sony Music has a specific structure in place for its global affiliates: Sony Music International, based in New York, under chairman Bob Bowlin and president Rick Dobbis. Most territories report directly to Dobbis.

Maarten SteinkampBMG has no specific international organization. Executives in the various territories report directly to Schmidt-Holtz, Smellie or Maarten Steinkamp, BMG president of international and acting president of BMG Germany. Sources say Steinkamp will play a major role in the new global setup.

Both companies have centralized their global operations and marketing in New York.

Observers suggest that the global marketing team of BMG executive VP/chief marketing officer Tim Prescott -- which has achieved success in recent months with the likes of Avril Lavigne, OutKast, Usher and Alicia Keys -- is in the best position to occupy the same role in the new company, augmented with several recruits from Sony.

In Europe, both companies have suppressed one layer of management and no longer have a president for the region. However, due to the importance of the market, a new regional structure could be put in place.

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Victims File Negligence Suit Over R.I. Club Fire

By Ray Waddell

Great WhiteAttorneys for 226 victims of the Station club fire in West Warwick, R.I., and their families filed a 70-count lawsuit July 22 in Providence Superior Court.

The Feb. 20, 2003, fire killed 100 people and injured some 200 more during a performance by the band Great White.

The lawsuit names 46 defendants, including Great White, singer Jack Russell, former band manager Paul Woolnough, Knight Records, tour manager Dan Biechele, Station owners Michael and Jeffrey Derderian, pyrotechnic firm Luna Tech, foam manufacturers, speaker manufacturer JBL, Providence radio station WJHY, its owner Clear Channel Broadcasting, Anheuser-Busch, Lloyd's of London, bus company Four Seasons and state and local officials.

Most of the charges are for negligence, as in the case of Anheuser-Busch, Clear Channel, the radio station and others. The suit says those defendants "knew or should have known" that Great White "customarily utilized pyrotechnics" in its show and "had repeatedly, openly and illegally used" them in performances prior to the Station show.

Steve Minicucci, one of the lead attorneys for the Plaintiff Steering Committee, tells ELW the suit was filed in state court with the "expectation that it would progress from state to federal court immediately."

The suit seeks unnamed compensatory damages for items ranging from funeral expenses to lost earnings for those injured and families of those killed.

"We expect (the suit) to progress in due course, but it will probably be a long process," says Minicucci.

Three criminal indictments were issued in December 2003, following a nearly 10-month investigation into the fire by a Rhode Island grand jury. Biechele and the Derderians were each charged with 100 felony counts of involuntary manslaughter with criminal negligence and 100 misdemeanor counts of involuntary manslaughter.

Each count of manslaughter carries a maximum penalty of 30 years. All three pleaded innocent.

Jeffrey Pine, lawyer for the Derderians, and Ed McPherson, attorney for Great White, could not be immediately reached for comment.

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RIAA, iMesh Settle Lawsuit

By Carolyn Horwitz


NEW YORK -- The RIAA says its member companies have reached a settlement in their copyright-infringement lawsuit against peer-to-peer network iMesh.

The trade group says iMesh has agreed to settle the claims for $4.1 million.

The RIAA filed the suit in September 2003 in U.S. District Court for the Southern District of New York. It claimed that Israel-based iMesh had facilitated in the copying of "millions, if not billions," of copyrighted recordings, adding that "massive copyright infringement is the raison d'etre of the iMesh system and service."

As part of the settlement, iMesh has agreed to shift to an online business that abides by U.S. copyright laws. The company says it will launch a new network next year that will provide consumers with "a unique way to find and share their favorite music and movies online in a Spyware-free, fun and safe environment while maintaining the community and technology aspects of peer-to-peer."

"Entering into this agreement with key players within the entertainment industry to put the lawsuit behind us will allow us the opportunity to migrate to a business model that will continue to provide users with the P2P experience that they have come to expect from iMesh," says Ofer Shabtai, COO of the digital company. "iMesh plans to transform the way consumers share media online, and we are excited about the prospect of working together with the entertainment industry as we usher in this new era of P2P file sharing."

RIAA chairman/CEO Mitch Bainwol says in a statement, "Peer-to-peer technologies hold real promise. This settlement with iMesh is an opportunity to demonstrate that promise in the legitimate marketplace. The constructive approach of iMesh stands in stark contrast to other file-sharing businesses who thumb their noses at Congress, continue to offload liability onto users, and dupe America's kids into breaking the law."

iMesh was represented in the litigation by Jeffrey Kimmel and Jeffrey Schreiber at New York's Meister Seelig and Fein LLP.

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Clear Channel Files Howard Stern Countersuit

By Bram Teitelman

NEW YORK -- Clear Channel Communications has filed a $3 million countersuit against Infinity Broadcasting -- the Federal Communications Commission licensee of WXRK, the New York radio station where the Howard Stern show is produced -- and One Twelve Inc., which provides management services for the DJ.

The action, filed July 21 in U.S. District Court for the Southern District of New York (case no. 04-CV-5154), alleges breach of contract, stating that some of Stern's radio shows were not in compliance with federal regulations, as required in his contracts with Clear Channel.

The suit also alleges that the contracts stipulated that Clear Channel could not alter Stern's shows, making the company powerless to delete unlawful content before it aired.

Clear Channel dropped Stern's show from six of its affiliates several months ago.

One Twelve and Infinity hit Clear Channel with a $10 million breach-of-contract suit on June 30. That action claimed that Clear Channel broke contracts it had to air the Stern program in the six cities and therefore violated license agreements.

One Twelve and Infinity accuse Clear Channel of wrongfully failing to notify them that the show was being dropped, as required by the contracts. They also charge that they are owed license fees.

Andy Levin"The radio show was pulled because Mr. Stern and infinity refused to assure us that future programs would conform to the law," Clear Channel chief legal officer Andy Levin says in a statement. "That was a key term in the agreement, and we gave them every opportunity to make good on their word before we permanently retired the show. We simply weren't willing to put the future of our radio licenses in the hands of Mr. Stern or Infinity. Fortunately, our contract doesn't require us to do that."

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Copyright Office Seeks Performance Right For HD Radio

By Bill Holland

WASHINGTON -- The U.S. Copyright Office has told Congress that with the advent of high-definition (HD) digital radio, the time has come to grant a full performance right in sound recording to labels and artists.

David Carson, general counsel of the Copyright Office, testified at a House panel hearing July 15 that the rights upgrade is needed because of HD receivers that can "cherry-pick" and redistribute individual music tracks.

Currently, the recording industry has only a limited performance right for streamed Webcast broadcasts and interactive transmissions.

Carson testified before the House Subcommittee on Courts, the Internet and Intellectual Property that the technology of HD radio takes the service to another level and necessitates a change in the law.

"In the absence of corrective action, the rollout of digital radio and the technological devices that promise to enable consumers to gain free access at will to any and all the music they want will pose an unacceptable risk to the survival of what has been a thriving music industry," he said.

He added that HD radio also poses a threat "to the ability of performers and composers to make a living by creating the works the broadcasters, Webcasters and consumer electronic companies are so eager to exploit because such exploitation puts money in their pockets."

The nation's radio broadcasters have fiercely opposed a performance right for more than a half century. The National Assn. of Broadcasters has successfully crushed legislative attempts to create such a right that would affect traditional, over-the-air broadcasts.

The United States is an exception in not providing creators with such a right; most other nations have a performance right in sound recordings.

Throughout the decades, the Copyright Office has been steadfast in its contention that such a right is legal and necessary, if not politically possible.

In the initial 1995 government white paper on copyright in the digital age, the Working Group on Intellectual Property Rights characterized the lack of a performance right in sound recordings as "an historical anomaly that does not have a strong policy justification -- and certainly not a legal one."

The Recording Industry Assn. of America supports a full performance right, as do artists' groups and unions.

David SalemiDavid Salemi, VP of marketing for iBiquity HD Radio, says: "Of course, we're opposed to people stealing content, and as a technology developer, we'd be part of a marketplace consensus on how best to achieve that. But changing the copyright law is something else, because we don't want to take 'fair use' away from the consumer.

"Also, I'm not so sure how this is different from copying something from satellite radio or the rock station on DirectTV," he adds. "If they're worried about the programming aspect -- 'look for this and record this' -- I don't know if that's do-able or not. Plus, I don't think broadcasters are going to be saying, 'Coming up next, U2 at 3:52.' "

Clear Channel Communications, the largest radio station owner in the United States, announced July 22 that it plans to covert at least 1,000 of its 1,240 radio stations to HD digital signals, in partnership with iBiquity.

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House Subcommittee OKs Family Movie Act

By Jill Kipnis

Lamar SmithLOS ANGELES -- The House Judiciary Subcommittee on July 21 approved the Family Movie Act in an 18-9 vote.

Rep. Lamar Smith (R-Texas) introduced the bill, H.R. 4586, on June 16. It states that movie filtering software does not violate copyright law.

The full House must still pass the bill, which has not been introduced in the Senate.

The Family Movie Act was proposed as the House was investigating a lawsuit between ClearPlay and the Directors Guild of America (DGA).

Utah-based ClearPlay manufactures software that allows film viewers to bypass certain scenes deemed as potentially inappropriate for children. The company sells filters for individual films that gives consumers the ability to skip graphic violence, sex, nudity and profanity.

The DGA filed a copyright-infringement suit against ClearPlay in 2002, alleging that the company's technology misrepresents directors' finished films and violates studio copyrights.

ClearPlay is also the target of a lawsuit filed May 13 by Nissim Corp. Nissim, the creator of a movie filtering product called CustomPlay, claims that the new ClearPlay-enabled DVD players, which debuted in April from RCA, infringe its patents.

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Electric Prunes Stewing Over Royalty Payments

By Chris Morris

Electric PrunesLOS ANGELES -- Members of the '60s garage-psychedelia band the Electric Prunes -- best known for their 1966 hit "I Had Too Much to Dream (Last Night)" -- have filed breach-of-contract suits against a production company and publisher. The suits claim that their record and publishing royalties have gone unpaid for years.

In an action filed July 19 in California Superior Court in Los Angeles (case no. BC318595), Electric Prunes bassist/organist Mark Tulin alleges that Damo Productions failed to pay him royalties due from the band's contract with Reprise Records and payable to Damo.

Tulin seeks damages of $500,000 plus interest.

Tulin and Electric Prunes vocalist/guitarist James Lowe lodged a second suit the same day in the same court (case no. BC318596) against Newcomer Music Publishing Co. The musicians claim that Newcomer has refused to pay publishing royalties.

The publishing suit also claims damages of at least $500,000.

The defendants could not be reached for comment.

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Holland's Disky Files New Suit Against King Biscuit

By Chris Morris

King Biscuit Entertainment Group LogoLOS ANGELES -- Dutch music firm Disky Communications has filed a federal complaint against King Biscuit Entertainment Group, alleging that it has not been provided with master recordings that were the subject of a previous legal action.

The new suit was filed July 13 in U.S. District Court for the Southern District of New York (case no. 04 CV 5413).

According to the action, Disky signed a written master licensing agreement with New York-based King Biscuit in August 2000.

The suit claims that in May 2001, Disky sued King Biscuit in federal court in New York (case no. 01 CV 3900), alleging that the company breached the licensing agreement.

In August of that year, Disky and King Biscuit entered into a settlement agreement. A written amendment to the licensing agreement stated that Disky had an exclusive five-year license (through August 2006) to distribute the masters at issue in Europe, Australia, New Zealand and South Africa.

Under the licensing agreement, King Biscuit was obligated to select and submit 25 album masters, of which Disky could accept up to 11.

At the time of the original agreement, Disky agreed to pay King Biscuit a $400,000 advance recoupable from royalties payable under the licensing pact. The advance was paid in August 2000.

The current action claims that King Biscuit "(failed to) provide Disky with any albums from which Disky can make its selection of the 11 albums it has the right to exploit."

The suit alleges that as of Dec. 31, 2003, 342,581.37 euros (approximately $442,400) of the advance to King Biscuit remained unrecouped.

Disky's suit seeks an award of specific performance to effect the label's selection of release of the 11 titles it is allegedly owed, plus compensatory damages to be determined.

A call to King Biscuit -- home of the King Biscuit Radio Network, King Biscuit Records and KingBiscuit.com -- was not returned.

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International Section

IFPI Report: Global Music Piracy Cost $4.5 Bil. In 2003

By Emmanuel Legrand

LONDON -- More than one in three physical recordings sold in the world is a pirate product, and an estimated 1.1 billion pirated optical discs were sold in the world last year.

The data were presented by the International Federation of the Phonographic Industry (IFPI) as part of a comprehensive overview of its actions against piracy in the "2004 Commercial Piracy Report," unveiled July 22 in London.

Based on pirate street value, the report says, the global pirate music business was worth $4.5 billion in 2003, representing 15% of the legitimate music market. (For the IFPI's list of the 10 countries that are the worst piracy offenders, see story below.)

"Overall, pirated products are the most serious threat to our business," says IFPI chairman/CEO Jay Berman.

IFPI head of enforcement Iain Grant says the organization is working with government enforcement agencies and international crime investigation units like Interpol to step up action against offenders.

The IFPI also works closely with the World Customs Organization's intellectual-property strategic group, with the aim of making IP protection a priority for customs authorities around the world.

Iain GrantGrant also emphasizes the importance of the IFPI's forensic laboratory, which is used to trace the manufacturing sources of pirated CDs. This is an area, says Grant, where the IFPI cooperates strongly with the Motion Picture Assn. of America and the Business Software Alliance.

One way to appreciate the importance of the issue, he says, is to look at the amount of seizures of pirated goods. In 2003, various enforcement agencies helped seize 56 million pirate products, up from 13 million in 2001. The vast majority of seizures were in Southeast Asia and Latin America.

More than 12,000 "stampers" -- master copies used to press illicit CDs -- were also seized, six times the number in 2002.

Overall, the IFPI has identified more than 1,000 CD plants in the world whose production capacity far exceeds that of the legitimate market, according to Berman. "There's an enormous over-capacity, more than 2.5 times the legitimate demand," he says.

Grant explains that there are two sources for pirated products. One is CD pressing plants, which tend to operate in countries where there are few IP protection laws and loose enforcement. This business, he says, is mostly for export purposes.

Russia, according to the IFPI, exports pirate product to the rest of the world, as does Ukraine. The IFPI has identified in Russia 20 plants (out of the existing 31) that "are involved in piracy," according to Grant.

The other type of piracy source is CD-R burning. These operations are viewed as a business for local consumption. Such is the case in Spain, where small units of CD-R plants produce discs that are sold through a network of street vendors, mostly illegal immigrants.

Grant and Berman are adamant that in both cases, organized crime is behind the piracy schemes. "What we are dealing with is not amateurs -- these are professional criminals," says Grant.

He adds that there is serious concern within law enforcement agencies such as Interpol that profits from this business could help finance terrorist groups. "The concern should be where the profits from these enterprises are going," says Grant.

Another field of action for the IFPI is to urge governments to not only pass strong laws but to enforce them. "Piracy is global -- we need strong optical-disc regulation," says Grant.

"No matter how much we do, at the end of the day, the problem cannot be addressed by the industry alone," says Berman. "Pirates have to be arrested and prosecuted -- that requires government action."

The industry's global anti-piracy actions are costing £50 million ($92 million) per year, according to Grant.

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IFPI Reveals List Of Worst Piracy Offenders

By Emmanuel Legrand

Jay BermanLONDON -- For the second year running, the International Federation of the Phonographic Industry (IFPI) has singled out 10 countries as being the world's worst music-piracy offenders.

This year's list consists of Russia, Spain, Taiwan, Thailand, Ukraine, Brazil, China, Mexico, Paraguay and Pakistan.

"These are the countries that failed to live up to their responsibility," says IFPI chairman/CEO Jay Berman, who calls upon the governments of the countries "to take firm action against commercial music piracy."

Poland is the only country to have been removed from the list since last year. (It was replaced by Pakistan.)

Following is a brief overview of the list:

BRAZIL
The legitimate music market in Brazil fell by 17% in value and 25% in units in 2003, and the IFPI attributes this mostly to piracy. The country has remained on the list because of "the inefficiency (or non-existence) of coordinated police efforts at a national level." Says Berman, "Simply put, nothing is done in Brazil."

However, the IFPI is putting some faith in the impact of a report published in June by the country's Congressional Anti-Piracy Commission. The Commission, set up to investigate piracy and the counterfeit trade, exposed a ring of corruption involving politicians, judges, civil servants and others. The report makes strong recommendations to the government in tackling piracy.

CHINA
Although China has a huge potential as a legitimate market, it still has the highest piracy level in the world -- 90% of the music sold there is pirated. The IFPI says it has seen no major improvement in China, despite the fact that the country has joined the World Trade Organization.

"We have made more seizures in China than in any other place in the world," says Berman. "But the manufacturing and selling of pirate products is not a criminal offense in China."

China is believed to be a major exporter of pirated goods. The IFPI calls for a radical overhaul of China's intellectual-property laws and a clear commitment from the government to address the issue.

MEXICO
Berman describes the situation in Mexico as similar to that of China, with endemic piracy and vast amount of product seized last year but little or no government action. Once the eighth-biggest music market in the world, Mexico saw legitimate sales fall nearly 50% in 2003.

The IFPI has launched the Street Vendors' Conversion Program, a pilot plan aimed at turning pirate stands into distribution points for legitimate products.

PARAGUAY
Despite being a small country, Berman says Paraguay is "strategically located" in South America and serves as the main point of entry of blank CD-Rs into the region, especially to Brazil.

The IFPI recognizes that the local government has taken steps to tackle piracy. However, the problem is compounded by weak criminal penalties against pirates.

PAKISTAN
A new entry to the top-10 list, Pakistan has become a major manufacturer and exporter of pirated CDs in Asia. The country has an annual manufacturing capacity of 180 million optical discs, while local demand is estimated at 20 million. CDs manufactured in Pakistan have been found in the Middle East, Europe, Africa and the United States.

The IFPI says the government of Pakistan has acknowledged the problem, but concrete action is needed.

RUSSIA
Along with China, Russia is "one of the world's largest producers and exporters of pirate CDs," according to Berman. Despite many raids and seizures, few cases are brought to court, and penalties are very low.

The IFPI asks the Russian government to plan "continuous plant inspections and (to) shut down plants producing pirate product," as well as to introduce "a comprehensive optical-media regulatory and enforcement scheme."

SPAIN
The only Western European country in the top 10, Spain is affected by massive CD-R piracy. Despite what the IFPI describes as "notable improvements in enforcement," thousands of illegal pirate businesses are flourishing.

The IFPI recommends that the government apply a "zero-tolerance approach" to illegal street vendors.

TAIWAN
CR-R piracy is endemic in Taiwan, and the country is one of the main exporters of pressed CDs in the region.

The IFPI calls upon the government to "curb the damage that the combination of physical piracy and unauthorized Internet music distribution is inflicting on the local industry." This requires a change in copyright law and the implementation of an optical-disc law.

THAILAND
After some successes in 2002, piracy levels in Thailand started to rise again in 2003. More action from the government is expected.

UKRAINE
The IFPI regards the situation in Ukraine as very serious. Pirated products flow into the country from Russia, but the country also has substantial optical-disc production capacity. "The government answers have been totally inadequate," says Berman.

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Washington Report

Pols Call For Language Updates For Induce Act

By Bill Holland

Orrin G. HatchWASHINGTON -- Sen. Orrin G. Hatch, R-Utah, vows to pass the Induce Act before the end of Congress this fall.

Speaking at a Senate Judiciary Committee hearing on July 22, Hatch said his bill was meant "to challenge the large, for-profit global piracy rings that threaten the future of today's cinema and recording industries."

He called for those unhappy with the current language in the bill to submit new wording.

"I intend to move this legislation this session," the Senate Judicial Committee chair said, "and I want it to protect both the copyright and technology communities. If you help, we might get it right ... but if you don't, we're going to do it anyway, because this is a huge, huge problem."

The Induce act, S. 2560, authored by Hatch and co-sponsored by five Republican and Democrat leaders, would allow artists and labels to sue peer-to-peer companies that profit from encouraging minors and others to commit copyright infringement. It states that whoever "intentionally induces" or "intentionally aids, abets, counsels or procures" any violation of copyright "shall be liable as an infringer."

Bill co-sponsor Sen. Patrick Leahy, D.-Vt., told the panel, "If you have problems with the early drafting of this bill, then work with us. We've got time."

Hatch and Leahy both want suggestions from all parties by the end of August.

Register of Copyrights Marybeth Peters testified at the hearing that the bill "will allow courts to examine fully the circumstances behind infringing activity to find those truly responsible, such as the operators of the current peer-to-peer networks who depend upon infringement for their commercial viability."

Members of the consumer-electronics and Internet communities oppose the bill, saying it would snare innocent parties and stifle innovation.

Gary ShapiroGary Shapiro, CEO of the Consumer Electronics Assn., said at the hearing, "I do not know of one consumer electronics or computer company in favor of this bill."

He characterized S. 2560 as "the biggest threat to our industry in more than 20 years. It rewinds Betamax, and paints a massive liability bull's-eye on companies."

To which Hatch replied, "We need your help in (redrafting) this bill. So far, there hasn't been much forthcoming from you in the way of suggestions."

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Commentary

EC Approval Of Sony BMG: A Textbook Merger Review

By Stephen Kinsella

EU FlagIn 2000, the European Commission voiced serious objections to a proposed merger between EMI and Warner Music. Ultimately, the parties pulled out of the transaction, so the Commission's apparent determination to block any deal was never put to the test.

Yet a few weeks ago, stories began circulating that the Commission was prepared to approve a very similar proposed merger, this time between Sony and BMG, without any conditions.

This development prompted talk of "U-turns" and howls of protest, in particular from the independent record companies' trade association, Impala. It noted that the Commission had addressed to Sony and BMG a confidential (but inevitably, heavily leaked) Statement of Objections.

The main charge in that document was apparently that reducing the number of majors from five to four would unacceptably limit competition, because the remaining majors would have the ability and incentive to align their prices. Also, it was claimed that any decision to clear Sony BMG would be inexplicable by reference to the earlier stance adopted toward Warner and EMI.

These criticisms were wrong on two fronts. First, they demonstrate a serious misunderstanding of the process by which the Commission analyzes mergers. More fundamentally, they ignore that the Commission's merger review has to be based on the facts and economic circumstances at the time, as well as the applicable legal standards, so that a past case can never be a wholly reliable indicator as to future decisions.

Dealing first with the process: Whenever the Commission wishes to conduct an in-depth review of a case -- which in turn means that one possible outcome is always a blocking decision -- it is obliged under its procedural rules to set out in writing all possible problems with the deal. These are sent to the parties in the form of a Statement of Objections, and that document always includes the Commission's "worst-case scenario."

However, the Statement of Objections is only a preliminary view, and the Commission continues examining the market, listening to the views of the parties involved and opposing third parties, and gradually defining or discarding theories.

Therefore, every Statement of Objections reads as being highly critical of the proposed deal. The fact that such documents are often selectively leaked can add to an impression that the deal is in trouble. That was true of Sony BMG, even though anybody watching closely could see from a very early stage that the merger was not likely to be blocked.

In fact, Sony BMG can be seen as a textbook example of how the procedure should work, which is that the Commission sets out the possible difficulties but continues its objective analysis and ultimately concludes that the merger will not significantly harm competition. In no sense could the ultimate clearance be described as a "U-turn."

The more interesting question is what had changed between 2000 and 2004. There are really two answers. First is that the underlying market circumstances altered significantly. Piracy is impacting sales to a far greater extent than had been accepted in 2000. The harm already caused by commercial piracy of CDs has been dwarfed by the explosion of illegal downloading, facilitated by high-speed Internet access and file-sharing software.

Record companies' sales have dropped significantly, and all are having to engage in heavy cost-cutting. To the EC, it no longer looked as though a merger of any two of the companies could automatically pose a serious and immediate threat to competition.

The second development that fundamentally improved the prospects for the merging parties is the increased interventionism of the European Court. Prior to 2002, the Commission regularly made suspect decisions, secure in the knowledge that any appeal would take years (by which time the deal in question would be dead) and was unlikely to succeed.

That changed in 2002, when the Court issued three judgments overturning Commission merger decisions. It cannot be entirely a coincidence that since those judgments, the Commission has not blocked a single merger.

In its rulings, the Court was highly critical of the Commission's reasoning and underlined that where the Commission did wish to block a transaction, it carried an extremely high burden of proof to demonstrate convincingly that competition would be significantly affected.

Essentially, what happened with Sony BMG was that the Commission case team did a thorough job and concluded that even if some concerns might be expressed, there was no compelling evidence to justify prohibiting the merger.

And that is exactly how it should be. In 1989, when the European Commission was given, after much debate, the exclusive power to vet pan-European mergers, serious limitations were imposed upon its power to do so. Underlying those restrictions was a presumption that mergers are a "good thing" because they encourage investment and lead to efficiencies and economies of scale.

Of more than 3,000 mergers that have been investigated by the Commission since 1989, fewer than 20 have been blocked, even if many others were allowed subject to conditions.

A key feature of the music market is that success is so unpredictable and ephemeral; new bands and artists are constantly emerging, and continued success depends on the ability to identify and nurture new talent.

It is therefore not surprising that the Commission should have been ultimately skeptical that a simple increase in market share would mean that one of the majors would suddenly be able to dominate the market, dictate terms to everybody else and be sure of the public's willingness to choose its records over all the alternatives.

Stephen Kinsella


Stephen Kinsella is the head of the Brussels office of international law firm Herbert Smith. He is also the founding editor of the EC Merger Control Reporter, published by Kluwer, and is chairman of the International Bar Assn.'s Antitrust and Trade Law Committee. Much of his work involves advising corporate clients on European competition law and representing them before the European Commission and the European Courts.



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Dream Makers & Deal Breakers

This Week's Dream Makers & Deal Breakers:

John MasonJohn Mason has become Of Counsel to the entertainment law firm of Goldring, Hertz & Lichtenstein.

The Beverly Hills, Calif.-based firm will assume representation of Mason's clients, who include Toby Keith, Reba McEntire, Travis Tritt, Olivia Newton John, Univision Music Group and Concord Music Group.

The move comes as Mason runs for a position as a Justice of the Supreme Court of Nevada.

Goldring, Hertz & Lichtenstein's client list already includes Beyonce, Destiny's Child, Alanis Morissette, Gwen Stefani, No Doubt, Will Smith, Herbie Hancock, McDonald's, Nickelodeon and Paul Frank Industries.

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