Bertelsmann and Sony announced today that they have sent to the European Commission their detailed reply to the "Statement of Objections" (SO) regarding the proposed merger of their recorded music div

Bertelsmann and Sony announced today that they have sent to the European Commission their detailed reply to the "Statement of Objections" (SO) regarding the proposed merger of their recorded music divisions.

In a statement, Bertelsmann says it "is confident that the reply, and the economic analysis it includes, deals with all issues raised in the SO."

The SO was sent to both parties on May 24 by the Commission. The SO, a copy of which has been obtained by billboard.biz, is a confidential document that outlines all the possible issues that may arise with the planned merger.

Sony and BMG claimed that the onset of piracy and the dramatic collapse of music sales in recent years have made consolidation a matter of urgency. But the SO interprets events differently.

The most serious charge relates to price collusion between the majors; the SO describes CD prices as "moving in parallel." It says, "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 co-ordinated action."

"The Commission notes that most majors have left real prices practically unchanged in the face of a falling demand," it adds.

The SO accepts that majors need high margins to cover development and promotion, especially for new artists. But it says the decision taken by majors to cut the number of artists and concentrate on high-volume, short-term hits contradicts this.

"The emphasis on a limited number of short-lived hits would suggest an increase in the importance of the price element as a driver of sales and a relative decrease in the importance of elements such as variety and quality," it says.

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

The SO devotes relatively little attention to the vertical integration from possible tie-ups between 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, and one on coordination concerns about music publishing.

The Commission still warns that "the proposed merger strengthens a position of collective dominance of the majors in the wholesale market for online music." In music publishing, the SO says it is likely a merger "would appreciably restrict competition."

In its conclusions, the SO states, "The Commission has come to the preliminary view that the notified concentration is incompatible with the common market. 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."

BMG and Sony will now have the opportunity to present their case before the Commission at an oral hearing, due to take place June 14-15 in Brussels.

Both parties say the hearing will give them the "opportunity to debate the outstanding issues with the Commission and address directly the third parties who have voiced their own views."

The Commission must make a formal decision on the merger by July 22.

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