Case T‑464/04

Independent Music Publishers and Labels Association (Impala, International Association)

v

Commission of the European Communities

(Competition – Regulation (EEC) No 4064/89 – Decision declaring a concentration compatible with the common market – Markets for recorded music and on-line music – Existence of a collective dominant position – Risk of creation of a collective dominant position – Conditions – Transparency of the market – Deterrence – Statement of reasons – Manifest error of assessment)

Summary of the Judgment

1. Competition – Concentrations – Assessment of compatibility with the common market – Creation of a collective dominant position significantly impeding effective competition in the common market

(Council Regulation No 4064/89)

2. Competition – Concentrations – Assessment of compatibility with the common market –Collective dominant position significantly impeding effective competition in the common market

(Council Regulation No 4064/89, Art. 2(3))

3. Competition – Concentrations – Assessment of compatibility with the common market – Creation of a collective dominant position significantly impeding effective competition in the common market

(Council Regulation No 4064/89, Art. 2(3))

4. Competition – Concentrations – Risk of creation or existence of a collective dominant position significantly impeding effective competition in the common market

(Council Regulation No 4064/89)

5. Competition – Concentrations – Declaration of compatibility with the common market on the basis of Article 6(1)(b) of Regulation No 4064/89

(Art. 253 EC; Council Regulation No 4064/89, Art. 6(1)(b))

6. Acts of the institutions – Statement of reasons – Obligation – Scope

(Art. 253 EC; Council Regulations No 17, Art. 3, and No 4064/89)

7. Competition – Concentrations – Examination by the Commission

(Council Regulation No 4064/89, Art. 2)

8. Competition – Concentrations – Administrative procedure – Statement of objections

(Council Regulation No 4064/89, Art. 2)

9. Competition – Concentrations – Administrative procedure

(Council Regulation No 4064/89)

10. Competition – Concentrations – Assessment of compatibility with the common market – Strengthening of a collective dominant position significantly impeding effective competition in the common market

(Council Regulation No 4064/89, Art. 2(3))

11. Competition – Concentrations – Assessment of compatibility with the common market – Creation of or strengthening of a pre-existing collective dominant position

(Council Regulation No 4064/89, Art. 2(3))

12. Competition – Concentrations – Assessment of compatibility with the common market – Creation of a collective dominant position significantly impeding effective competition in the common market

(Council Regulation No 4064/89)

1. In the context of Regulation No 4064/89 on the control of concentrations between undertakings, the Commission is obliged to assess, using a prospective analysis of the reference market, whether the concentration which has been referred to it leads to a situation in which effective competition in the relevant market is significantly impeded by the undertakings involved in the concentration and one or more other undertakings which together, in particular because of factors giving rise to a connection between them, are able to adopt a common policy on the market and act to a considerable extent independently of their competitors, their customers and, ultimately, of consumers.

Such a prospective analysis requires close examination of, in particular, the circumstances which, in each individual case, are relevant for assessing the effects of the concentration on competition in the reference market and the Commission must provide solid evidence.

The procedure does not entail the examination of past events – for which often many items of evidence are available which make it possible to understand the causes – or of current events, but rather a prediction of events which are more or less likely to occur in future if a decision prohibiting the planned concentration or laying down the conditions for it is not adopted. Thus, such an analysis makes it necessary to envisage the various chains of cause and effect with a view to ascertaining which of them are the most likely.

(see paras 245, 248, 522-523)

2. A situation of collective dominance which significantly impedes effective competition in the common market or a substantial part thereof may arise following a concentration where, taking into account the actual characteristics of the relevant market and of the change to its structure brought about by the completion of the transaction, the concentration would have the consequence that, being aware of the common interests, each member of the dominant oligopoly would consider it possible, economically rational and therefore preferable to adopt the same policy on a lasting basis on the market with the aim of selling at above competitive prices, without having to conclude an agreement or resort to a concerted practice within the meaning of Article 81 EC, without actual or potential competitors, or customers and consumers, being able to react effectively.

(see para. 246)

3. Three conditions must be satisfied in order for collective dominance significantly impeding effective competition in the common market or a substantial part thereof to be created following a concentration. First, the market must be sufficiently transparent for the undertakings which coordinate their conduct to be able to monitor sufficiently whether the rules of coordination are being observed. Second, the discipline requires that there be a form of deterrent mechanism in the event of deviant conduct. Third, the reactions of undertakings which do not participate in the coordination, such as current or future competitors, and also the reactions of customers, should not be able to jeopardise the results expected from the coordination.

(see para. 247)

4. In the context of the control of concentrations between undertakings established by Regulation No 4064/89, although when assessing the risk that such a dominant position will be created the Commission is required, ex hypothesi, to carry out a delicate prognosis as regards the probable development of the market and of the conditions of competition on the basis of a prospective analysis, which entails complex economic assessments in respect of which the Commission has a wide discretion, the finding of the existence of a collective dominant position is itself supported by a concrete analysis of the situation existing at the time of adoption of the decision. The determination of the existence of a collective dominant position must be supported by a series of elements of established facts, past or present, which show that there is a significant impediment of competition on the market owing to the power acquired by certain undertakings to adopt together the same course of conduct on that market, to a significant extent, independently of their competitors, their customers and consumers.

It follows that, in the context of the assessment of the existence of a collective dominant position, although the conditions which must be satisfied in order for a collective dominant position to be created, which were inferred from a theoretical analysis of the concept of a collective dominant position, are indeed also necessary, they may, however, in the appropriate circumstances, be established indirectly on the basis of what may be a very mixed series of indicia and items of evidence relating to the signs, manifestations and phenomena inherent in the presence of a collective dominant position.

Thus, in particular, close alignment of prices over a long period, especially if they are above a competitive level, together with other factors typical of a collective dominant position, might, in the absence of an alternative reasonable explanation, suffice to demonstrate the existence of a collective dominant position, even where there is no firm direct evidence of strong market transparency, as such transparency may be presumed in such circumstances.

(see paras 250-252)

5. When the Commission declares a concentration to be compatible with the common market on the basis of Article 6(1)(b) of Regulation No 4064/89 on the control of concentrations between undertakings, it is a necessary and sufficient condition in relation to the duty to state reasons that the decision states clearly and unequivocally the reasons why the Commission considers that the concentration at issue does not raise serious doubts as to its compatibility with the common market. However, it cannot be inferred from that obligation that, in such a hypothetical case, the Commission must provide reasons for its assessment of all the matters of law and of fact which may be connected with the notified concentration and/or which were raised during the administrative procedure.

(see para. 281)

6. In the context of the control of concentrations established by Regulation No 4064/89, the statement of objections is merely a preparatory document, the findings of which are purely provisional, and the Commission is obliged to take account of the evidence obtained during the administrative procedure and also of the arguments put forward by the undertakings concerned, and must drop any objections which might ultimately prove to be unfounded. That applies a fortiori in the case of provisional findings made a number of years previously in the context of the examination of a different concentration or of the findings of a different competition authority in a different context.

The final decision must thus be based solely on all the circumstances and evidence relevant for the purpose of the assessment of the effects which the proposed concentration will have on competition in the reference markets. It follows that the mere fact that the Commission did not explain in the body of the decision the change in its position by comparison with that set out in the statement of objections cannot as such constitute a lack of, or an insufficient, statement of reasons.

(see paras 285, 300, 335)

7. The basic provisions of Regulation No 4064/89 on the control of concentrations between undertakings, and in particular Article 2, confer on the Commission a certain discretion, especially with respect to assessments of an economic nature. Consequently, review by the Community Courts of the exercise of that discretion, which is essential for defining the rules on concentrations, must take account of the margin of discretion implicit in the provisions of an economic nature which form part of the rules on concentrations.

Whilst the Community Courts recognise that the Commission has a margin of discretion with regard to economic matters, that does not mean that they must refrain from reviewing the Commission’s interpretation of information of an economic nature. Not only must the Community Courts, inter alia, establish whether the evidence relied on is factually accurate, reliable and consistent but also whether that evidence contains all the information which must be taken into account in order to assess a complex analysis and whether it is capable of substantiating the conclusions drawn from it.

(see paras 327-328)

8. In the context of the control of concentrations between undertakings established by Regulation No 4064/89, the statement of objections is merely a preparatory document, the findings of which are purely provisional, and the Commission is obliged to take account of the evidence obtained during the administrative procedure and also of the arguments put forward by the undertakings concerned, and must drop any objections which might ultimately prove to be unfounded. That applies a fortiori in the case of provisional findings made a number of years previously in the context of the examination of a different concentration or of the findings of a different competition authority in a different context. That does not mean, however, that the statement of objections is wholly without merit or wholly irrelevant. In effect, unless the entire investigative administrative procedure is to be deprived of the slightest value, the Commission must be in a position to explain, not in the decision, admittedly, but at least in the context of the proceedings before the Court, its reasons for considering that its provisional findings were incorrect; but above all, the findings set out in the decision must be compatible with the findings of fact made in the statement of objections, in so far as it is not established that the latter findings were incorrect.

(see paras 335, 410)

9. Although the procedure for the control of concentrations necessarily relies to a large extent on trust, as the Commission cannot be required to ascertain on its own, in the slightest detail, the reliability and accuracy of all the information submitted, the Commission cannot, on the other hand, go so far as to delegate, without supervision, responsibility for conducting certain parts of the investigation to the parties to the concentration, in particular where those aspects constitute the crucial element on which the decision is based and where the data and assessments submitted by the parties to the concentration are diametrically opposite to the information gathered by the Commission during its investigation and also to the conclusions which it drew from that information.

(see para. 415)

10. The market transparency which is necessary for the purpose of identifying a collective dominant position which would be strengthened by a concentration is that which allows each member of the dominant oligopoly to be aware of the conduct of the others in order to ascertain whether or not they are adopting the same course of conduct, that is to say, which provides it with the means of knowing whether the other operators are adopting and maintaining the same strategy. Transparency on the market should therefore be sufficient to allow each member of the dominant oligopoly to be aware, sufficiently precisely and immediately, of the development of the conduct on the market of each of the other members. The requisite transparency does not mean that each member may at any moment be aware of every detail of the precise conditions of each sale made by the other members of the oligopoly but must, first, make it possible to identify the terms of the tacit coordination and, second, give rise to a serious risk that deviant conduct of such a type as to jeopardise the tacit coordination will be discovered by the other members of the oligopoly.

(see para. 440)

11. As regards the examination, within the context of the application of Regulation No 4064/89 on the control of concentrations between undertakings, of the creation of a collective dominant position significantly impeding effective competition in the common market, in order for a situation of collective dominant position to be viable, there must be adequate deterrents to ensure that there is a long-term incentive in not departing from the common policy, which means that each member of the dominant oligopoly must be aware that highly competitive action on its part designed to increase its market share would provoke identical action by the others, so that it would derive no benefit from its initiative.

The mere existence of effective deterrent mechanisms is sufficient, in principle, since if the members of the oligopoly conform with the common policy, there is no need to resort to the exercise of a sanction. Furthermore, the most effective deterrent is that which has not been used.

As regards, in the same context, the examination of the existence of such a dominant position, the condition relating to retaliation may consist, not in ascertaining the mere existence of retaliatory measures, but in examining whether there have been any breaches of the common course of conduct which have not been followed by retaliatory measures. In that regard, two cumulative elements must be satisfied in order for the fact that no retaliatory measures have been employed to be taken to mean that the condition relating to retaliation is not satisfied, namely proof of deviation from the common course of conduct, without which there is no need to consider the use of retaliatory measures, and then actual proof of the absence of retaliatory measures.

(see paras 465-466, 468-469)

12. Examination of the determination by the Commission of the creation of a collective dominant position must be based on a prospective analysis.

As regards, in the context of that examination, the questions of retaliatory measures, the Commission must apply itself not to seeking evidence that retaliatory measures have been used in the past but to ascertaining the existence of effective deterrent mechanisms. Seeking evidence of the use of retaliatory measures in the past cannot constitute a valid test, as the condition is perfectly capable of being satisfied without there having been any retaliatory measures in the past. As the assessment of the risk of the creation of a collective dominant position is not, by definition, based on the existence of a prior common policy, the criterion relating to the absence of retaliatory measures in the past is wholly irrelevant.

(see para. 537)

JUDGMENT OF THE COURT OF FIRST INSTANCE (Third Chamber)

13 July 2006 ( )

(Competition – Regulation (EEC) No 4064/89 – Decision declaring a concentration compatible with the common market – Markets for recorded music and on-line music – Existence of a collective dominant position – Risk of creation of a collective dominant position – Conditions – Transparency of the market – Deterrence – Statement of reasons – Manifest error of assessment)

In Case T‑464/04,

Independent Music Publishers and Labels Association (Impala, international association), established in Brussels (Belgium), represented by S. Crosby and J. Golding, Solicitors, and I. Wekstein-Steg, lawyer,

applicant,

v

Commission of the European Communities, represented by A. Whelan and K. Mojzesowicz, acting as Agents,

defendant,

supported by

Bertelsmann AG, established in Gütersloh (Germany), represented by J. Boyce, Solicitor, P. Chapatte and D. Loukas, lawyers,

Sony BMG Music Entertainment BV, established in Vianen (Netherlands),

Sony Corporation of America (SCA), established in New York, New York (United States),

represented by N. Levy, Barrister, R. Snelders and T. Graf, lawyers,

interveners,

APPLICATION for annulment of Commission Decision C(2004) 2815 of 19 July 2004 declaring a concentration to be compatible with the common market and the functioning of the EEA Agreement (Case No COMP/M.3333 – Sony/BMG),

THE COURT OF FIRST INSTANCE OF THE EUROPEAN COMMUNITIES (Third Chamber),

composed of M. Jaeger, President, J. Azizi and E. Cremona, Judges,

Registrar: I. Natsinas, Administrator,

having regard to the written procedure and further to the hearing on 22 September 2005,

gives the following

Judgment

Facts

1 The Independent Music Publishers and Labels Association (Impala) is an international association, incorporated under Belgian law, whose members are 2 500 independent music production companies.

2 On 9 January 2004 the Commission received notification pursuant to Article 4 of Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings (OJ 1989 L 395, p. 1), as rectified (OJ 1990 L 257, p. 13) and as amended by Council Regulation (EC) No 1310/97 of 30 June 1997 (OJ 1997 L 180, p. 1) (‘the Merger Regulation’), of a proposed concentration by which the undertakings Bertelsmann AG (‘Bertelsmann’) and Sony Corporation of America (‘Sony’), part of the Sony group, proposed to merge their global recorded music businesses.

3 Bertelsmann is an international media company: its worldwide activities include music recording and publishing; television and radio; book, magazine and newspaper publishing; print and media services; and book clubs and music clubs. Bertelsmann is active in recorded music through its wholly-owned subsidiary Bertelsmann Music Group ‘BMG’. BMG’s record labels include Arista Records, Jive Records, Zomba and Radio Corporation of America (RCA) Records.

4 Sony is globally active in music recording and publishing, industrial and consumer electronics and entertainment. In the recorded music sector it acts through Sony Music Entertainment. Sony’s labels include Columbia Records Group, Epic Records Group and Sony Classical.

5 The proposed operation consisted in the integration of the global recorded music businesses of the parties to the concentration (with the exception of Sony’s activities in Japan) into three or more newly-created companies pursuant to a Business Contribution Agreement dated 11 December 2003. In the aggregate, these joint venture companies were to be operated under the name Sony BMG.

6 Under the agreement, Sony BMG would be active in the discovery and development of artists (the so-called A&R (‘Artist and Repertoire’) activity) and the marketing and sale of the resulting discs. Sony BMG would not be involved in related activities such as music publishing, manufacturing and distribution.

7 On 20 January 2004, the Commission sent out questionnaires to a number of players on the market. The applicant replied to that questionnaire and lodged a separate submission on 28 January 2005 in which it set out the reasons why in its view the Commission should declare the operation incompatible with the common market. The applicant set out its concerns about further concentration in the market and the impact that this would have on market access, including in the retail sector, the media, the internet and consumer choice.

8 By decision dated 12 February 2004, the Commission found that the notified operation raised serious doubts as to its compatibility with the common market and the functioning of the Agreement on the European Economic Area (‘the EEA Agreement’). It therefore initiated proceedings pursuant to Article 6(1)(c) of the Merger Regulation.

9 On 24 May 2004 the Commission sent a statement of objections to the parties to the concentration, in which it provisionally concluded that the notified operation was incompatible with the common market and the functioning of the EEA Agreement, since it would strengthen a collective dominant position in the recorded music market and in the wholesale market for licences for online music and would coordinate the parent companies’ behaviour in a way incompatible with Article 81 EC.

10 The parties to the concentration replied to the statement of objections and a hearing took place before the Hearing Officer on 14 and 15 June 2004 in the presence of, among others, the applicant.

11 By decision of 19 July 2004, the Commission declared the concentration compatible with the common market pursuant to Article 8(2) of the Merger Regulation (‘the Decision’).

12 In response to its application of 26 July 2004, the applicant received a non-confidential copy of the decision on 23 September 2004.

Procedure and forms of order sought by the parties

13 By application lodged at the Registry of the Court of First Instance on 3 December 2004, the applicant brought the present action.

14 By a separate document lodged on the same date, the applicant requested that the Court should adjudicate on the case under an expedited procedure, in accordance with Article 76a of the Rules of Procedure of the Court of First Instance.

15 By letter of 17 December 2004, the Commission expressed its doubts as to whether the action was appropriate for an expedited procedure in this case, emphasising, in particular, in addition to the complexity of the case, the difficulties resulting from the fact that, in order to explain the grounds of its decision, it would be required to use very voluminous and complex data and that such a line of defence would, moreover, require delicate negotiations with the parties to the concentration and third parties regarding the extent to which the Commission would be able to disclose confidential information.

16 By statements lodged at the Registry of the Court of First Instance on 10, 11 and 19 January 2005, Bertelsmann, Sony BMG and Sony Corporation of America sought leave to intervene in support of the form of order sought by the Commission. Those applications were granted by order of the President of the Third Chamber of 4 February 2005.

17 In the meantime, by decision of 13 January 2005, the Court of First Instance, by way of measures of organisation of procedure as provided for in Article 64(3)(e) of the Rules of Procedure, invited the parties to take part in an informal meeting on 24 January 2005 in order to examine the possibility of dealing with the case under an expedited procedure, in the light, in particular, of the question raised by the Commission concerning the confidentiality of certain material in the file.

18 By a statement lodged on 18 January 2005, the Commission, in agreement with the applicant, requested a measure of organisation of procedure consisting, essentially, in allowing the Commission to submit certain documents and information which had been transmitted to it on a confidential basis by communicating them solely to the applicant’s counsel, to the exclusion of the applicant itself.

19 By decision of 24 January 2005, the Court, taking note, in particular, of the agreement reached between the applicant and the interveners, granted the request for a measure of organisation of procedure. The Court also granted the application for an expedited procedure, while stating that that decision might be reconsidered at any time in the light of developments in the file and the procedure. A timetable for the submission of pleadings was also drawn up.

20 By a pleading lodged on 11 February 2005, the applicant submitted a request for amendment of the measure of organisation of procedure. By letter of 18 February 2005, the defendant and the interveners submitted their observations on that request. By letter of 22 February 2005, the applicant withdrew its request for amendment of the measure of organisation of procedure.

21 Meanwhile, on 11 February 2005, the Commission had lodged its defence. On 25 February 2005, Bertelsmann, Sony BMG and Sony lodged their statement in intervention.

22 In the meantime, by letter of 15 February 2005, the applicant sought leave to lodge observations on the new information in the Commission’s defence. By decision of 21 February 2005, the Court granted that request and gave the defendant permission to request leave, by no later than 4 March 2005, to lodge complementary observations, which the defendant did. By letter of 1 March 2005, the applicant objected to that request. On 14 March 2005 the Commission lodged its complementary observations.

23 Upon hearing the report of the Judge-Rapporteur, the Court (Third Chamber) decided to open the oral procedure and, by way of measures of organisation of procedure, requested the Commission to produce a number of documents and to reply in writing to a series of written questions.

24 By letter of 19 September 2005, the Commission requested further time to lodge its answers to the questions put by the Court; its request was granted. By letter of 21 September 2005, the Commission lodged its answers to the Court’s questions.

25 The parties presented oral argument and answered the questions put by the Court at the hearing on 22 September 2005.

26 By letter of 26 September 2005, the Commission lodged a number of documents after the hearing and requested leave to be able to comment in writing on any observations that might be lodged by the applicant on its answers to the written questions of 21 September 2005. Its request was granted.

27 On 29 September 2005, the applicant lodged a pleading concerning the Commission’s answers to the written questions put by the Court.

28 On 11 October 2005, the Commission lodged its final observations on the applicant’s observations on the Commission’s answers to the written questions put by the Court.

29 The applicant claims that the Court should:

– disregard the documents produced by the Commission in the annexes to its defence;

– annul the decision;

– in the alternative, annul the decision in so far as it deals with one or other of the following points:

– the collective dominant position on the market for licences for online music;

– the individual dominant position on the market for the distribution of online music;

– the coordination of the respective activities of the parties to the concentration in the field of music publishing;

– order the Commission to pay the costs.

30 The Commission, supported by the interveners, contends that the Court should:

– dismiss the application as unfounded;

– order the applicant to pay the costs.

Law

31 In support of its action for annulment, the applicant puts forward five pleas in law, divided into a number of parts. By its first plea, the applicant maintains that by not finding that a collective dominant position in the market for recorded music existed before the proposed merger and that that dominant position would be strengthened, the Commission infringed Article 253 EC and made a manifest error of assessment and an error of law. By its second plea, the applicant maintains that by not taking the view that the proposed concentration would create a collective dominant position on the market for recorded music, the Commission infringed Article 253 EC and made a manifest error of assessment and an error of law. The third plea alleges infringement of Article 2 of the Merger Regulation in that the Commission did not consider that a collective dominant position on the worldwide market for online music licences would be created or strengthened. By its fourth plea, the applicant maintains that, by not taking the view that Sony would achieve an individual dominant position on the market for online music distribution, the Commission infringed Article 253 EC and made a manifest error of assessment. By its fifth plea, the applicant maintains that, by concluding that the proposed concentration would not have the effect of coordinating the music publishing activities of the parties to the concentration, the Commission made a manifest error of assessment and infringed Article 81 EC, in conjunction with Article 2(4) of the Merger Regulation.

I – The evidence annexed to the defence

A – Arguments of the parties

32 The applicant observes that the defence reveals that the Commission relied during the administrative procedure on documents and information to which the applicant had access only when it received a copy of the defence, although they played a pivotal role since they were used by the Commission to justify its departure from the position taken in the statement of objections, namely that the proposed concentration would create or strengthen a collective dominant position and would be incompatible with the common market.

33 If the applicant had seen those documents, which contain incomplete information and are misleading, during the administrative procedure, it would have been able to demonstrate those fundamental defects and the decision would have been different or, at least, would have been required to contain express reasons for rejecting the applicant’s observations. The applicant criticises the Commission for having kept those documents to itself and for having relied on them without ever putting them to the test of cross-examination or subjecting them to the observations of third parties.

34 While acknowledging that the Commission is obliged to protect business secrets and is under no obligation to disclose all the information on the file to third parties during administrative procedures relating to the control of concentrations, the applicant maintains that the Commission is not thus entitled to deprive those third parties of the opportunity to present their views on the subject; it could, for example, prepare a non-confidential abridged version of the information in question.

35 The applicant makes clear that it is not introducing a plea alleging breach of essential procedural requirements, but maintains that the new evidence adduced by the Commission has come too late to save the decision on the substance and that it represents an attempt by the Commission to regularise the decision ex post facto. The applicant observes that failure to produce documents during the administrative procedure cannot be remedied during the judicial procedure (Case C‑51/92 P Hercules Chemicals v Commission [1999] ECR I-4235, paragraph 78) and submits that the documents in question must be disregarded.

36 The Commission submits that this claim must be rejected.

B – Findings of the Court

37 It must be noted at the outset that the evidence which the applicant requests the Court to disregard was produced in the annexes to the defence lodged by the Commission in accordance with Article 46 of the Rules of Procedure. The applicant does not indicate in what way the production of that evidence by the Commission is contrary to the Rules of Procedure.

38 It must then be noted that neither the grounds on which the applicant seeks to have that evidence disregarded nor even the sense of its request are readily apparent.

39 In the first place, although the applicant maintains that the documents produced constitute an attempt to regularise the decision ex post facto, it does not claim that those documents were received or drawn up after the adoption of the decision; on the contrary, it asserts that they played a pivotal role during the administrative procedure, in that the Commission relied on them as a basis for the Decision. Even on the assumption that it were shown to be true, that circumstance could not lead to the documents being disregarded. Furthermore, although the applicant criticises the Commission for attempting to regularise the Decision ex post facto, it does not allege, at least in support of the present request, that there has been a breach of the principle that the statement of reasons must be contained in the decision itself and that it is not sufficient for it to be explained for the first time before the Court (Joined Cases T-374/94, T-375/94, T-384/94 and T-388/94 European Night Services and Others v Commission [1998] ECR II-3141, paragraph 95). In any event, the penalty for any failure to provide sufficient reasons is annulment of the contested measure and not the exclusion of the documents and the question whether the Decision is supported by a statement of reasons of the requisite legal standard will be examined in the present case in the context of the various pleas put forward by the applicant.

40 In the second place, while the applicant acknowledges that the Commission is under no obligation to disclose all the information on the file to third parties during the administrative procedure relating to the control of concentrations, it observes that, according to the case-law, failure to produce documents during the administrative procedure cannot be remedied during the judicial procedure. Without its being necessary to examine the scope of the rights of the defence or of access to the file by third parties in concentration procedures, it is sufficient to observe that the applicant expressly states that it does not intend to introduce a new plea alleging breach of essential procedural requirements. The request cannot therefore be upheld in so far as it is based on that ground. In any event, a breach of the rights of the defence can be penalised only where it is established that failure to disclose the documents was able to influence the content of the decision in question to the detriment of an applicant, which cannot be done without an examination of those documents.

41 In the third place, the applicant maintains that the documents contain incomplete information and are misleading, and that if it had had access to them during the administrative procedure it would have been able to demonstrate their fundamental defects, which might have led to a different decision. However, while that circumstance may mean that the evidence adduced by the Commission must be assessed with circumspection, it cannot result in the measure sought by the applicant being granted. Quite to the contrary, that measure would deprive the applicant of the possibility of demonstrating the alleged unreliability or irrelevance of the documents in issue in the context of its pleas alleging a manifest error of assessment.

42 Last, the applicant’s alternative request that the Court should declare that the documents are unconvincing or irrelevant must also be rejected, for the same reasons. In any event, that request constitutes a substantive question which will be examined in the context of the various pleas and arguments raised in the action.

43 It follows from the foregoing observations that the applicant’s request that the documents produced by the Commission in support of its defence be disregarded, or declared irrelevant, must be rejected.

II – First plea: strengthening of a pre-existing collective dominant position on the market for recorded music

44 The first plea is divided into two parts, the first relating to the erroneous nature of the Commission’s assertion that there was no collective dominant position on the market for recorded music before the proposed concentration and the second to the error resulting from the absence of a finding that that pre-existing collective dominant position would be strengthened by the proposed concentration.

A – Arguments of the applicant

1. First part

45 As a preliminary point, the applicant observes that both the statement of objections and the decision contain much evidence that before the merger the market for recorded music had all the features of a market on which a dominant position prevailed, in accordance with the criteria laid down in the case-law (Case T-342/99 Airtours v Commission [2002] ECR II-2585).

46 The applicant submits in that regard, first, that the major record companies (‘the majors’) are described as having all the features of a dominant group (high market shares and significant financial strength (recital 53 to the Decision), maintaining high price levels (recital 56 to the Decision) and an oligopolistic structure (recital 148 to the Decision)) and therefore interdependence.

47 The applicant claims, second, that the Commission found that the market had all the features conducive to tacit agreements and facilitated the monitoring of that coordination (points 93 to 116 of the statement of objections) and that it examined 10 factors indicating tacit agreement, which in the applicant’s submission have not changed since the statement of objections. The product is homogenous in its format and consumers purchase discs by multiple artists and of multiple genres, thus making room for substitutability (recital 110 to the Decision). The market is highly conducive to coordination and coordination has in fact taken place (recital 112 to the Decision). There is a stable customer base (recital 112 to the Decision) and the parties to the concentration monitor the retail market (recital 113 to the Decision).

48 Third, the prices suggest the existence of a collective dominant position. There is parallelism of actual net prices (points 76 to 80 of the statement of objections and recitals 75, 82, 89, 96 and 103 to the Decision). Public selling prices (‘PPDs’) are known and the number of reference prices is limited (recitals 111 and 112 to the Decision). Net selling prices are closely linked to PPDs (recitals 77, 84, 91, 98 and 105 to the Decision). PPDs and actual net prices are closely aligned and transparent and the transparency of average real net prices is not affected by discounts (points 88, 90 and 92 of the statement of objections and footnotes 45, 49, 52, 55 and 57 to the Decision).

49 Fourth, the Commission found that there were potentially effective deterrent mechanisms (points 128 to 132 of the statement of objections and recital 118 to the Decision) and the majors are not subject to those effective competitive constraints.

50 The applicant maintains that the reasons put forward by the Commission, based on the heterogeneity of the content of albums, the insufficiency of price transparency owing to the existence of campaign discounts and the lack of evidence of the slightest retaliations, do not make it possible to reject the finding of the existence of a collective dominant position and that the Commission’s analysis is vitiated by a lack of reasoning, a manifest error of assessment and an error of law.

a) Breach of the obligation to state reasons

51 The applicant maintains that the Decision infringes Article 253 EC because it does not include a statement of the facts and law which led the institution in question to adopt them, so as to make possible review by the Court and so that the Member States and the nationals concerned may have knowledge of the conditions under which the Community Institutions have applied the Treaty (Case 45/86 Commission v Council [1987] ECR 1493).

Product homogeneity

52 As regards, first, product homogeneity, the applicant criticises the Commission for not having stated the reason why product homogeneity carries more weight than a continuum of substitutability, whereby most consumers purchase music by multiple artists and of multiple genres, or than format homogeneity as regards price and transparency. Nor does the Commission indicate why the finding that the pricing of albums is quite standardised is invalidated by the general statement that pricing depends ‘on the success of the album’. The applicant claims that recital 110 to the Decision contains contradictory findings.

Transparency

53 As regards, second, transparency, the applicant maintains that the Commission’s statements and arguments concerning discounts, which have the effect of negating all the evidence on transparency, are inadequately reasoned.

54 Thus, in the applicant’s submission, the Commission maintains that in the large countries the pricing transparency created by the PPDs is eliminated by campaign discounts, but it fails to explain the function of such discounts and their significance for the pricing system.

55 Likewise, in respect of the smaller countries, it is not clear why the Commission attached so much importance to campaign discounts and not to file discounts, when it asserted in the statement of objections that ‘as in the larger territories, the most important discounts in all countries are file discounts’. Nor is there any precise description of what file discounts are. The Commission’s assessment of transparency in the smaller countries alternates, without explanation, between the comparison of file discounts and campaign discounts, so that it is not clear whether the examination related to campaign discounts or file discounts.

56 The applicant further maintains that the Decision refers only to the evidence on discounts relating to Sony and BMG and does not cover the other majors (see recital 71 and footnote 43 to the Decision). The reasoning is therefore incomplete.

Deterrents

57 As regards, third, deterrents, the Commission does not explain why, even if it were correct, the fact that it did not find proof that retaliatory measures were ever used should negate all the evidence of the existence of effective deterrents.

Constraints

58 Fourth, and last, the Decision, in contrast to the statement of objections, contains no assessment of countervailing market power and provides no explanation for that absence, which amounts to a complete absence of reasoning.

b) Manifest error of assessment

59 The applicant refers to the decided principle that the Commission makes a manifest error of assessment where, when it is required to balance conflicting claims, it gives too much weight to one of them (Case T‑111/00 British American Tobacco International (Investments) v Commission [2001] ECR II-2997, paragraph 58) or where the reasons provided to justify a decision do not in fact support that decision. Likewise, where an assessment by the Commission is not supported by certain evidence or certain facts, it must be regarded as not having been made in an appropriate and not unreasonable manner (Case C-16/90 Nölle [1991] ECR I-5163). In the applicant’s submission, the assertion that there was no collective dominant position is not supported by relevant facts, reasoning or evidence and the Commission has failed to fulfil its obligation to assess all the relevant factors.

60 The applicant maintains that the Decision is vitiated by manifest errors of assessment in the determination of product homogeneity, transparency and the existence of deterrents, in the assessment of countervailing power and in the analysis of the common policy.

Product homogeneity

61 In the applicant’s submission, the Commission made an error of assessment in taking the view that content heterogeneity prevailed over format homogeneity, while accepting that the consumer buys records by many artists and of many genres and that there is therefore a ‘continuum of substitutability’. In any event, the parameter relating to product heterogeneity would be relevant only if pricing were set on the basis of individual titles and not, as in this case, on the basis of a few reference prices (recitals 110 and 111 to the Decision). If the Commission’s logic were followed, there could never be a dominant position in intellectual property industries, since there can never be total homogeneity of content.

Transparency

– General argument

62 The applicant maintains that the evidence adduced indicates that the majors’ pricing is certainly sufficiently transparent to enable them to align their prices. It submits that the Commission has adduced no evidence to invalidate that analysis, but merely inferred from the alleged variation in discounts that transparency could be eliminated or reduced to the point at which price alignment would no longer be possible.

63 The error of assessment is apparent from the Commission’s own findings that:

– there is parallelism and relatively similar price development on the part of the majors on average net prices (recitals 75, 82, 89, 96 and 103 to the Decision);

– PPDs could be used as a focal point for alignment (see recitals 76, 83, 90, 97 and 104 to the Decision);

– PPDs and average net prices have moved closely in parallel (recitals 77, 84, 91, 98 and 105 to the Decision).

64 The applicant observes that PPDs are transparent, that retail prices are known, that average net prices move in parallel with PPDs and that retailers’ margins are known with sufficient accuracy. It follows, in the applicant’s submission, that net prices to retailers (that is to say, PPDs less discounts) are transparent in spite of the discounts. That is also clear from the statement of objections (points 81 to 92) and from recital 77 to the Decision, which states that ‘[i]f a significant deviation from pricing policies was being implemented by the majors through the grant of discounts, this deviation would have been reflected in their average net prices’.

65 The applicant claims that the Commission made a manifest error of assessment by placing undue weight on discounts, especially campaign discounts, because:

– it relied on the information provided by Sony and BMG on discounts rather than on the information on the parallelism between PPDs and net prices for all of the majors (see footnote 43 to the Decision);

– according to the information provided by retailers, the discounts are transparent. Twenty of the 26 retailers questioned by the Commission stated that the majors were aware of the discounts given by the others. That is particularly true of file discounts, the most important discounts, as they are negotiated annually;

– Sony and BMG produced weekly reports monitoring the retail market which included information on their competitors (recital 113 to the Decision);

– for compilations, the majors have joint distribution arrangements and joint ventures in the course of which file discounts are revealed;

– there is a high rate of transfer of senior executives between the record companies;

– the weekly charts provide information on sales by title, which makes it easy to detect the titles that become hits and generate the bulk of sales (recital 73 to the Decision);

– according to the Report of the Office of Fair Trading (the United Kingdom competition authority), information on competitors is more readily available on the market for recorded music than in any other industry.

66 The applicant observes that, on the basis of those factors, the Commission concluded, at point 81 of the statement of objections, that ‘discounts [were] mostly stable and [were] not used to effectively alter pricing policy’. The applicant maintains that the facts have not changed since then.

67 In any event, campaign discounts are generally not used in respect of chart records, which generate about 80% of revenue, but only to entice consumers to draw on the list of titles in the back catalogue, and they have little impact on the sample which the Commission considered (recitals 70 and 71 to the Decision). Furthermore, as the data relating to campaign discounts which the Commission examined related only to Sony and BMG, they are even less relevant.

68 The proportion of the majors’ pricing structure potentially affected by a lack of transparency is therefore small, as may be seen from the report annexed to the application which explains the pricing and discounts system in Europe.

69 The applicant maintains that the Commission had sufficient material against which to test its analyses but that it failed to do so, in particular, in respect of the evidence concerning retailers. By not properly assessing the facts and attaching too much importance to discounts, in particular campaign discounts, the Commission made a manifest error of assessment.

– General observations on the new evidence

70 On the basis of the new information produced by the Commission in the annexes to its defence, the applicant infers that the Commission appears to have based its assessment that the market is not transparent on the complexity of the individual variations in discounts between customers and between individual titles, and over time. However, the existence of such individual variations, which are sometimes considerable, does not preclude the possibility that pricing is governed by a finite number of known structures and rules which make average prices predictable and from which any significant and systematic deviation would be apparent.

71 Such rules might not perhaps make it possible to predict the price of each individual release charged to each individual retailer and at every point in time, but would none the less make it possible to know, with a sufficient degree of certainty, the net prices that would result from a set of PPDs and to establish whether or not competitors were complying with those rules. They therefore provide the transparency necessary for the existence of collective dominance. Coordination of behaviour, which is apparent in the parallel movement of PPDs and net average prices, might therefore simply emerge on the basis of commonly-known, well-understood structures which are capable of being monitored, rather than on the basis of perfect and complete knowledge of each individual pricing decision.

72 The applicant maintains that the Commission has not investigated whether the observed parallelism in average prices (both gross and net) could have resulted from the coordination of behaviour resulting from such rules, but has concluded rather that that was not the case, since there were individual variations, without considering whether those variations were statistically significant and had a material impact on averages.

73 Such rules do not apply to all cases, but to a substantial portion of each major’s sales in each class of record (new releases, new artist, full-price catalogue, mid-price catalogue, budget catalogue, etc.), for each of which there is a finite number of general retail strategies which govern the vast majority of sales (re-charting a record, participating in retail campaigns, buying shop-window positioning, etc.). Those sales strategies may admittedly differ in each territory and according to customers (supermarkets, specialist chains, independent stores, etc.), but are none the less finite in number and known by sales personnel. Those rules or structures are sufficient to permit price coordination without any need for specific knowledge of net and gross prices for individual releases and, moreover, in an environment in which demand for individual titles varies and in which the success of albums cannot be predicted with certainty, offer the flexibility necessary to adapt in individual cases without undermining the overall pricing structure.

74 Individual variations must not obscure the fact that overall net prices are closely aligned to gross prices and that that is likely to be the case because all undertakings follow certain general rules which make overall pricing highly predictable and systematic divergences apparent. There is therefore transparency.

75 Examination of the new evidence annexed to the defence shows that the Commission has focused on individual variations without considering whether they were statistically significant. The Commission has not undertaken a proper statistical analysis of the underlying data or considered the significance of price or discount ranges or the relevance of variations within common pricing bands, nor has it questioned retailers in order to ascertain whether or not individual variations were within the general rules of the pricing system. The Commission has concluded, incorrectly, that the mere existence of variations precluded the possibility that that variation is caused by a few isolated cases, while the bulk of sales are subject to prices determined on the basis of commonly-known and predictable rules.

76 Furthermore, the Commission has examined the evidence using flawed methodology and without carrying out the necessary tests.

77 The applicant makes the following general observations on the new evidence adduced by the Commission:

– a large part of the data is not volume-adjusted for the purpose of assessing the significance of ranges of pricing and discounts. Where the data are aggregated correctly – that is to say, between all players and adjusted for volume – variations are much less significant;

– in most cases, the data are not analysed from a statistical point of view and it is therefore impossible to ascertain whether, in relation to different classes of products, the variations are significant;

– with the exception of a small number of data used in the statement of objections, the data compare only the pricing of the parties to the concentration. The Commission’s argument that establishing opaque discounting practices between two majors is sufficient to reduce transparency is wrong in the light of the fact that Sony and BMG had been performing very differently on the market and that, with differing performance across a series of releases, price and discount ranges would vary even in a uniform pricing system. Moreover, the parties to the concentration were historically the two most different majors, so that the concentration would not only reduce the number of players but also make them more similar;

– the Commission did not investigate whether there were data within the majors that directly contradicted the alleged variety and complexity of pricing, namely budgets or other data which accurately predict net and gross prices and discounts and whose construction is parallel between competitors and stable over time;

– testimony from executives of the parties to the concentration does not focus on key questions – such as the existence of general pricing rules and the monitoring of prices – and was not tested.

78 The Commission’s view that average net prices are the expression of a multitude of quite diverse individual decisions and that the latter must be observable with sufficient certainty in order to permit meaningful coordination of net prices is incorrect, since it is sufficient that each undertaking can monitor whether the pricing decisions taken by each of the other undertakings, across their releases, comply with certain pricing rules in order to make price movements known to each other and to sustain tacit collusion.

79 The variations observed by the Commission on the basis of the data supplied by the parties to the concentration, apart from being less material than the Commission seems to believe, cannot be taken as evidence of opacity of pricing, because, as in any industry in the intellectual property sector in which individual titles’ performance is variable and subject to a diversity of marketing activity, but where aggregated slates of such titles conform to generally known rules, it is perfectly possible to explain any variation in the range of discounts and prices by reference to a few commonly-known principles.

80 The applicant expresses surprise, moreover, that the Commission has included very little evidence used in the statement of objections, some of which was weighted and covered the entire industry, but focused rather on the information supplied by Sony and BMG, which lacks those qualities. The differences must therefore be reconciled before the initial data are rejected and it does not appear that the Commission has carried out a balanced assessment.

– Individual examination of the various pieces of evidence

81 The testimony of the executives of Sony and BMG set out in Annex B.2 merely confirms that different discounts were given to different customers, but does not relate to whether or not those discounts were largely determined by a series of general rules. Although the statements emphasise the very complex nature of the pricing mechanism, in reality the annex which seeks to demonstrate the complexity of campaign discounts belies that complexity by describing the operation of the discounts on a single page. The question that should have been asked was whether there were standard margins associated with different pricing categories and whether most of the discounts tended to cluster within narrow ranges. The questions appear to have been conceived in such a way as to avoid disclosing the fact that mark-ups could be known as general rules and therefore did not need to be known on a release-by-release basis and that there was no need to reverse-engineer individual prices in order for one large record company to be able to monitor the prices applied by its competitors. Nor were those questions put to retailers, although that would have permitted a comparison of their answers.

82 As regards the annex which shows the percentage of Sony’s and BMG’s gross sales in their top 10 PPDs between 1998 and 2003, which, according to the Commission, demonstrates the unpredictability of success and therefore the need for each major to monitor the PPDs of more than 80 of its competitors’ albums, the applicant notes certain inconsistencies in the data (such as variations in the periods) and claims that the data show nothing other than that the merging parties sell their products at different PPDs. That is irrelevant in so far as the Decision states that the PPDs are rather transparent. Furthermore, contrary to what the Commission contends, it follows from recital 111 to the Decision that ‘majors only need to monitor the pricing points of a limited number of best-selling albums to account for most of the sales’. Nor does that information contradict the considerations expressed by the Commission at the hearing, according to which a large majority of each major’s sales was accounted for by very few PPDs. It is not necessary to monitor the prices of more than 80 albums, since there are generally understood principles and rules; in order to monitor overall respect for coordination, it is sufficient to establish, for very few titles, whether those rules have been observed and whether anomalies are systematic. The conclusion which the Commission draws from the variation in the percentage of the gross sales of the parties to the concentration is therefore unwarranted.

83 Furthermore, those charts seem to emphasise one factor, namely the unpredictability of success, which contrasts with the key statements made in the Decision, that (i) PPDs are transparent and present a focal point for alignment (recitals 76, 83, 90, 97 and 104 to the Decision); (ii) the monitoring of other majors’ list prices is possible (recitals 76, 83, 90, 97 and 104 to the Decision); and (iii) the majors only need to monitor the pricing points of a limited number of best-selling albums to account for most sales (recital 111 to the Decision). Last, even on the assumption that it is necessary to monitor the PPDs of more than 80 albums (or 60 following the concentration), that does not appear to be as onerous a task as the Commission suggests.

84 As regards the annexes dealing with the average invoice discounts granted by Sony and BMG to their top 10 customers in four out of the five large Member States, the applicant states that it wonders first of all to what extent the differences in average invoice discounts reflect differences in treatment of the various customers rather than differences in the relative performance of the portfolios of the parties to the concentration, since the strength of the releases of a large record company and its business mix (chart releases, supermarket activity, catalogue activity, specialist and campaign activity) would affect the average discount granted to customers. Second, any differences in the treatment of customers by the parties to the concentration do not imply that their pricing decisions are opaque, since those differences may be systematic and predictable, and stable over time.

85 The annex which is supposed to show examples where, according to the parties, there is no correlation or parallel movement is irrelevant, as it could be explained by the difference in performance of the portfolios of the parties to the concentration and, moreover, shows remarkable similarities (lower discounts granted to the same customer, or discounts changing at the same time, or differences that are stable over time). Only the example of customer 1 in Germany is consistent with the view that one of the majors can cut effective prices without that being matched by its competitors, but a single specific variation during a specific year in a given territory in relation to a specific customer is not convincing. Furthermore, as the charts only look at Sony’s and BMG’s data, and as those data are not weighted, the variations are exaggerated. That is particularly true of the prospective analysis that the Commission ought to have undertaken, because since the concentration combines two undertakings performing very differently it might increase symmetry and homogeneity and therefore the likelihood of tacit collusion.

86 As regards the annexes which present supposed evidence of variations in invoice discounts granted by the parties to the concentration over a five-year period to their top 10 customers for their top 20 compact discs (‘CDs’), the applicant observes that the charts show only ranges of discounts and that these may be misleading, as they show extremes rather than averages and statistically-significant variations around those averages. Wide discount ranges might be explained by some rare exceptions, with the vast bulk of discounts being at the same level. Furthermore, in addition to their methodological inadequacies, those charts show some interesting regularities. For example, in country A both parties to the concentration generally offer higher discounts to wholesalers than to supermarkets and general retailers and one of the annexes to the defence shows a surprisingly well-aligned relationship between the ranges of discounts.

87 As regards the annexes which, in the Commission’s contention, show that the parties to the concentration did not follow a uniform discount practice, that their practices evolved over time and that in 2003 the breakdowns of the discounts granted by the parties to the concentration were not very similar, the applicant again emphasises that the differences found in the ranges of discounts over time and between the parties to the concentration could be the result of differences in performance and that that does not in any way suggest that discounts are not the consequence of a known set of rules. Furthermore, the data presented point rather in the opposite direction from that indicated by the Commission (structure of discounts that are quite stable and similar, or converging, and a high correlation factor).

88 The applicant maintains that discount structures do not vary over time as much as the Commission’s analysis suggests. The figures show the coefficient of correlation of the discount structure of each of the parties to the concentration in a given year and the discount structure for the previous year. Even though the business mix affects discounts, the overall high correlation coefficients suggest that discount structures remain relatively stable over time, thus producing fairly predictable net prices from transparent PPDs.

89 Furthermore, the presentation of data in very narrow bands, in combination with particular cut-off points, may accentuate the differences (for example, if the discount changes from slightly below 15% to slightly above 15% there is a change in band without a significant change in the actual discount). Last, the applicant emphasises that if performance were based on the success of Sony’s and BMG’s top 20, there would be a change in prices in a highly competitive market. As that is not the case, the applicant concludes that the discount mechanism is not really a strong competitive element or a source of opacity.

90 As regards the annex showing the distribution of net prices for Sony’s and BMG’s top five customers in 2003, the applicant submits that the Commission’s inference that different customers make quite different proportions of their purchases from a given major in the various net price bands is of questionable relevance, since the transparency and predictability of pricing do not require that purchase patterns be the same, or similar, between customers of the two majors. As the determining factors for discount levels necessary to achieve sales targets are product mix and the performance of frontline new releases among customers, it is difficult to see how the Commission reached the conclusion that there was a difference in the distribution of net prices in general for the two majors.

91 Furthermore, although those data relate only to Sony and BMG, they are none the less more appropriate because they are weighted. A more detailed examination of the distributions country by country shows remarkable similarities presented in diagrammatic form.

92 Furthermore, the Commission’s conclusion that one of the annexes shows differentiation between Sony and BMG is not consistent with the assessment at recitals 74 and 75 to the Decision that their net average prices were relatively similar, which, on the balance of probabilities, suggests the use of pricing rules which ensure that the majority of prices are clustered around a few price points. Rather than support the view that complex pricing makes prices opaque, that evidence would appear to support the opposite view that prices are fairly predictable and similar in spite of the apparent complexity of individual pricing decisions.

93 The applicant contends that the annex showing Sony’s quarterly average net prices per album in the most-used PPDs does nothing to indicate opacity, as the chart is subject to the range problem, that is to say, it merely shows extremes without analysis of weighted averages and variations from averages. Besides, the annex is irrelevant as it relates only to Sony and is not comparative.

94 The following annex is also irrelevant, as it is not comparative and seeks only to show that BMG offers retailers different types of discount.

95 The applicant also criticises the Commission for not having indicated whether the apparent variations in the level of campaign discounts might be explained by a few simple principles. The applicant finds that surprising, since the principles set out by the Commission in one of the annexes to its defence suggest that such rules exist in relation to campaign discounts and that they are very simple, as follows:

i) campaign discounts vary with the size of the order (other than in the specific case of France);

ii) campaign discounts vary with the type of customer (for example, in Germany wholesalers and music clubs receive generally higher discounts);

iii) campaign discounts vary with the type of title or release (for example, depending on the artist’s popularity, the target audience);

iv) campaign discounts focus on customers with a reputation for selling a particular genre, based on the nature of the retailer and the demographics of its customer base;

v) campaign discounts vary with the nature of the campaign (for example, only one title, or a basket of titles, usually catalogue);

vi) campaign discounts vary according to the level of marketing spend that the retailer is prepared to provide in return.

96 The applicant contends that if those rules are commonly known, it should not be difficult to predict with reasonable accuracy the level of discount that a major can be expected to offer to a particular customer for a particular title in a particular campaign and therefore to establish whether actual discounts are in line with those rules. The Commission does not appear to have investigated that point.

97 Furthermore, as one of the annexes provides data for only a single year, it is not conclusive, since it does not make it possible to assess whether discount levels are stable and therefore predictable.

98 As regards the annex consisting of a number of monitoring reports submitted to the Court by the parties to the concentration, the applicant observes that that evidence does not suggest that there is no pricing mechanism consisting in a series of general rules and guidance on how prices are set. The Commission should have focused not on whether there was specific monitoring of individual discounts but on whether there was any necessity for such monitoring since the variations within the pricing system are exceptions to the price points which apply to the vast majority of sales.

99 As regards the annex containing the study prepared by the economics consultancy RBB Economics (‘the RBB study’), which finds that a record company would not be in a position to infer wholesale prices from the observed retail prices at which competitors’ products are sold, the applicant claims that that study concentrates essentially on the pricing of individual releases and not on whether there is a systematic link between PPDs and net wholesale prices for the large majority of releases over a reasonable period. Different retailers may indeed pursue different strategies when setting their retail prices, but it would be surprising if there were no clear-cut and systematic relationship between average retail prices of releases in a particular category, sold at a particular retailer, and their effective wholesale prices, over a sufficiently large range of titles and over a reasonable period. The fact that there is no single uniform mark-up applied automatically to wholesale prices does not mean that retail prices and wholesale prices are unrelated to such an extent that it is impossible to monitor compliance with the general pricing principles. There is a general level of mark-up for different categories of product (top price, super top price, mid-price, developing artists, budget, etc.).

100 The applicant observes that the study avoids examining the rules of the pricing system and expresses its doubt that the Commission subjected the study to examination with retailers or third parties or that it requested the aggregated price and discount data that every major must have in its budgets. Nor is there any comparison with the other data already collected. Such an examination would have revealed that, contrary to the claims made in the study:

– there is a systematic link between classes of product if those products are delineated properly to reflect their performance, maturity and importance in the customer base;

– the assertion that retailers do not apply a standard mark-up to wholesale prices is misleading, since it deliberately avoids the existence of classes of product and classes of retail campaigns, which are both known and consistent between majors. The study ignores the requirement to explain the clustering of discount levels in aggregate around a small number of price and discount levels. Variations in mark-ups merely reflect the accommodation of the rules to demand;

– more generally, the Commission failed to consider the fact that it was examining an industry in the intellectual property sector in the recorded music market. The fact that individual releases move through different known and understood price and discount categories during their life-cycles does not necessarily imply that there cannot be transparency or even coordination.

Deterrents

101 The applicant maintains that the Commission failed to examine all possible forms of retaliation, but looked only at those relating to compilation joint ventures. Thus, if a major were to introduce a policy of reducing prices to retailers, the others might punish that major by inducing retailers to reject the lower price policy by offering them higher discounts and increased cooperative advertising. A further deterrent would be to restrict the chart eligibility of the ‘deviant’ major’s lower-priced products or products which display unilateral innovation. The criteria for chart eligibility are generally determined by committees composed on the whole of record companies, sometimes in conjunction with retailers, and relate in particular to formats or minimum prices.

102 The applicant maintains that the Commission made a manifest error of assessment in that, while finding the existence of credible deterrents, it concluded that there were no such deterrents, on the ground that it had found no evidence that they had been used. The most effective deterrent is the one that does not have to be used.

Constraints

103 The applicant contends that the Commission’s analysis is incomplete in so far as the decision contains no examination of countervailing market power. In the statement of objections, moreover, the Commission found that neither the independents nor retailers imposed effective competitive constraints on the majors.

Absence of a proper analysis of common policy

104 In the applicant’s submission, the Commission focused its analysis on price competition and wholly neglected a series of other issues although, according to the Notice on horizontal mergers (OJ 2004 C 31, p. 5), coordination may take various forms.

105 Thus, the Commission should have considered whether or not it was more beneficial for the majors to compete vigorously for market share than to adhere to a common policy. The fact that the majors’ market shares are relatively stable and that changes are mainly the consequence of the acquisition of independents or of mergers among themselves indicates an absence of genuine price competition or a common policy consisting principally in not engaging in highly competitive actions, especially where the market is oligopolistic (Joined Cases 142/84 and 156/84 BAT and Reynolds v Commission [1987] ECR 4487, paragraph 43).

106 Nor did the Commission consider whether the majors had parallel licensing policies for online music or for the signing of artists. It did not examine all the features which provide evidence, detailed in points 96 to 116 of the statement of objections, that the music markets are ‘particularly conducive to coordination and facilitate the monitoring of such coordination’ (point 94 of the statement of objections). The Commission none the less identified 10 factors indicating tacit collusion, including structural links, licensing and distribution agreements, joint ventures and compilations.

107 The Commission also failed to consider whether the concentration might result in an ability to reduce supply, in terms of numbers of new titles or in terms of originality of new releases, or whether it would impoverish creativity, quality and diversity in musical choice (see Commission Decision of 7 January 2004 declaring a concentration compatible with the common market and the functioning of the EEA Agreement (Case No COMP/M.2978 – Lagardère/Natexis/VUP), OJ 2004 L 125, p. 54, paragraph 674) or would have an impact on consumer choice, as it had done in the statement of objections in the EMI/Time Warner case (see point 55, which deals with marginalisation of the independents and its impact on the choice and diversity of music being offered to the public). Last, the analysis took no account of Article 151(4) EC or of cultural diversity.

c) Misapplication of the law on collective dominance

108 The applicant maintains that the Commission made three errors of law.

109 In the first place, the Commission concluded that prices were not transparent, on the ground that it was not certain that the transparency was total, when, according to paragraph 62 of Airtours v Commission, paragraph 45 above, the test is whether there is ‘sufficient market transparency’ for all members of the oligopoly to be aware ‘sufficiently precisely and quickly’ of the way in which other members’ market conduct is evolving. In this case there is sufficient transparency.

110 In the second place, the Commission considered that because of the discounts there is no common policy, but did not establish that the discounts led to significant price reductions, so that, in the applicant’s submission, any competition by means of the discounting structure is marginal. According to paragraph 60 of Airtours v Commission, paragraph 45 above, however, marginal competition does not in itself invalidate a finding of a collective dominant position. The trader must be aware that ‘highly competitive action designed to increase its market share (for example a price cut) would provoke an identical reaction by the others’. In particular, the Commission need only prove ‘the lack of effective competition between … members of the dominant oligopoly’ and not the elimination of all competition (see, to that effect, Joined Cases T-191/98 and T‑212/98 to T-214/98 Atlantic Container Line and Others v Commission [2003] ECR II-3275, paragraph 645).

111 In the third place, the Commission erred in law by basing its analysis on the absence of past evidence of retaliation, whereas according to paragraph 195 of Airtours v Commission, paragraph 45 above, the Commission need not necessarily prove that there is a specific ‘retaliation mechanism’ of greater or lesser severity but must show the existence of deterrents.

2. Second part

112 The applicant observes that, in order to establish whether or not a concentration would strengthen a collective dominant position, the Commission must, by way of prospective analysis, examine its impact on the reference markets (Airtours v Commission, paragraph 45 above, paragraphs 58 and 59). However, the Commission carried out no prospective analysis and wholly failed to consider the question of the strengthening of the dominant position, since, following a retrospective analysis, it wrongly found that there was no pre-existing dominant position capable of being strengthened.

113 To the extent to which the strengthening of the dominant position was examined on the basis of the retrospective analysis, the decision is vitiated by a manifest error of assessment for the reasons set out in the first part, while the failure to carry out a prospective analysis constitutes an error of law.

B – Arguments of the Commission

114 The Commission is of the view that the three grounds of annulment raised by the applicant in respect of the market for recorded music overlap to a large extent and that it will be therefore useful to set out, first of all, an account of the reasoning in the Decision and of the evidence on which it based its conclusions, before proceeding to examine certain misrepresentations of the Decision’s content which appear in the application and then concluding by analysing the specific arguments raised by the applicant.

1. The Commission Decision and the evidence on which it is based

a) Context

115 As regards the pricing system applicable to recorded music, the Commission explains that each major and each independent record company periodically determines a range of different price lists for its CD albums, known as ‘published prices to dealers’. Each major normally has more than 50 PPDs of that type, of differing importance, which may be allocated to ‘full-price’, ‘mid-price’ and ‘budget’ categories, and fixes the list price for every CD album it issues by reference to one of those PPDs. However, the net price actually charged by a record company to a customer (a retailer or a wholesaler) is lower than that list price owing to invoice discounts (file discounts and campaign discounts), which may vary from customer to customer, over time, or (in the case of campaign discounts) from album to album. Each record company negotiates with each of its customers an annual file discount (possibly with different rates for pop, classical and television-advertised albums) which applies to all sales to that customer. Campaign discounts, on the other hand, are set on a case-by-case basis, for varying durations, for individual albums or baskets of albums which the record company wishes to promote; they are not necessarily granted to all customers and the amount is not necessarily the same. The Commission draws attention to the fact that the net price of a given album to a given customer must be distinguished from the average net price of all albums sold by a given major in a given year, which is composed of the sum of all the (potentially widely-varying) net prices for individual albums sold to individual customers, divided by the total number of albums sold by the record company concerned.

116 The Commission found that there had been a significant fall in demand for recorded music on CDs since 1999 (recitals 55 to 59 to the Decision).

b) The five large markets (Germany, the United Kingdom, France, Italy and Spain)

117 The Commission states that it initially analysed whether an existing common understanding on prices among the majors could be identified in the five large Member States (recitals 69 to 108 to the Decision). It investigated whether there was parallelism in prices, by examining movements in the majors’ average net real prices and considering whether any observable parallelism could be explained by coordination. In order to do so, the Commission first looked at PPDs as possible focal points and then considered whether discounts were aligned and sufficiently transparent to allow efficient monitoring of any coordination in respect of net prices (recital 73 to the Decision).

Alignment of average net prices and PPDs

118 In the five large markets, the Commission found only a partial similarity between net real prices. In each country, the net average real prices of each major moved for most of the time in a range of around 10% or more by reference to the others. The Commission considered that such a degree of similarity was not conclusive (recitals 75, 82, 89, 96 and 103 to the Decision), for obvious reasons. First, no parallelism of average net real prices was observed. Second, parallelism of behaviour is not generally sufficient to establish existing coordination if the mechanisms of that coordination cannot be identified. Third, in the present case the Commission did not conclude that movements in each major’s average net prices were or could be known by the other majors. Average net prices are the expression of a very large variety of individual pricing decisions and those decisions must be capable of being identified with sufficient certainty if they are to permit meaningful coordination of net prices.

119 The Commission did in fact find some indications that list prices (that is to say, PPDs) could be used as a basis for alignment. In each of the five large Member States, the main part of each major’s total sales (more than 55%, indeed 85% in one country) was made using five PPDs and even (with the exception of Spain) between one and three PPDs for half or more of the top 100 single album CD sales in 2003. Moreover, list prices are relatively transparent since they are shown in the majors’ catalogues (recitals 76, 83, 90, 97 and 104 to the Decision).

120 However, the Commission identified two types of obstacles to the use of PPDs as a reference point for tacit coordination on net prices and as a means of monitoring compliance with such coordination – one relating to the degree of complexity inherent in the PPDs themselves and the other to the complexity and opacity of the relationship between list and net prices.

Complexity and PPDs

121 As regards PPDs, CD albums are not a perfectly homogenous product, owing to the difference in content (recital 110 to the Decision). Although a ‘continuum of substitutability’ permits at least albums of the same genre to be regarded as belonging to a single product market (recitals 9 to 13 and 110 to the Decision), CD albums remain differentiated heterogeneous products. Consequently, even if the pricing and marketing of CD albums at wholesale level is quite standardised (elements of standardisation of wholesale pricing are: the three broad price categories; each major’s standardised set of PPDs; and the fact that file discounts and agreed return rates for unsold records are normally determined according to a limited number of parameters), individual albums have varying degrees of anticipated and actual success, which influences the initial fixing of the PPD when the album is released and subsequent movements in the PPD.

122 Furthermore, owing to the unpredictability of success, each major wishing to make absolutely certain that coordination of net prices was being complied with by the other majors would presumably be required to monitor the PPDs of more than 80 albums produced by its competitors per annum in a given country (or more than 60 albums of that type per annum following the concentration, since each major’s top 20 albums account for a minimum of 30% of its total sales and in many cases over 50% (recital 111 to the Decision)). A record company wishing to obtain a more complete picture of the market would face a huge increase in monitoring activity, as the top 100 albums of each major would normally account for around 70 to 80% of its total music sales (recital 71 to the Decision) and such an exhaustive survey would require the monitoring of almost 400 albums. The parties to the concentration have submitted evidence that the mix of PPDs for their respective top 20 single CD albums often changed substantially from one quarter to the next. Although weekly hit charts facilitate such monitoring by identifying successful titles (recital 112 to the Decision), they do not eliminate the problem.

123 As regards the finding in the Decision that ‘[there were] some indications that PPDs could have been used as focal points for an alignment of the majors’ prices’, the Commission emphasises that that is not a definitive finding. Although the Commission found that the monitoring of list prices appeared to be possible, the shifts in use of different PPDs depicted in an annex to the defence show that such a monitoring exercise, combined with efforts to identify discounting practices, would at the least be resource-intensive.

Alignment and complexity of prices

124 In the five large Member States, the Commission identified a close link between the movements of Sony’s and BMG’s average gross real prices and average net real prices over a six-year period, with very stable net-to-gross price ratios both across albums and over time (recitals 77, 84, 91, 98 and 105 to the Decision). However, the stable relationship between average gross and net prices (that is to say, the average discount) of each of the parties to the concentration for all albums in a given country inevitably levels out the effects of different types of invoice discounts (file discounts and campaign discounts), of differences in invoice discounts (file discounts and campaign discounts) granted to different customers and of differences in invoice discounts (essentially campaign discounts) granted for individual albums. The conclusion regarding the stability of the ratio of average net and gross prices must also be qualified by the methodological limitations of the analysis. Only Sony’s and BMG’s data were taken into account, because the other majors stated that they only billed net prices; and, in order to overcome the problem arising from the fact that a given album may have more than one PPD in the course of a given year, the parties to the concentration attributed a single gross price to each album corresponding to the PPD at which most copies of that album were sold in the year in question (gross sales per album were thus calculated simply as PPD x number of albums sold). The gross price recorded for each album and used to calculate each major’s average gross price is therefore an approximation.

125 Furthermore, a stable ratio of average gross to average net prices is not sufficient to prove past or likely future coordination in the absence of a demonstrable mechanism enabling the majors to monitor the emergence of that gross-net relationship from a multitude of individual pricing decisions. The Commission did not discover sufficient evidence of such a mechanism.

126 The Commission noted, first of all, that Sony’s and BMG’s invoice discounts (file discounts and campaign discounts) were by far the most important discounts in every large Member State (with the exception of France in BMG’s case). The overall levels of their respective invoice discounts varied to some extent, when expressed as a proportion of their respective aggregate gross sales to their top 20 customers in those Member States (the difference between those levels was [confidential] ( ) percentage point of their respective aggregate gross sales in Italy, [confidential] percentage points in the United Kingdom and Spain, [confidential] percentage points in Germany and [confidential] percentage points in France).

127 Furthermore, the Commission found no evidence that invoice discounts were sufficiently aligned between the parties to the concentration on a customer-by-customer basis in the big Member States to permit an inference of coordination and transparency. Recitals 79, 86, 93, 100 and 107 to the Decision record the differences in the total invoice discounts of the two parties at individual customer level, expressed as a proportion of gross sales to each individual customer. The Commission found that the respective average invoice discounts which they granted to each of their top 10 common customers in the large Member States other than France in the period 2000 to 2003 varied by between 2 and 5% (United Kingdom, Germany, Spain) or 1 and 3% (Italy). In the United Kingdom, Germany and Spain, the average annual discounts of the two parties to the concentration for some of those important customers varied in certain years by more than 5% of their respective gross sales to those customers. In France (recital 86 to the Decision), the average invoice discounts granted by the parties to the concentration to each of their common top 15 customers varied more markedly, by up to 10%. Given the importance of BMG’s retrospective discounts and ‘contract discounts’ in France, the Commission also examined total discounts. It found differences between the two parties to the concentration of up to 3% in 2003 among this group of customers, and of about 5% for three of them. Those fluctuations were mainly attributable, in all the large Member States, to campaign discounts.

128 The Commission also took into account (recitals 79, 86, 93, 100 and 107 to the Decision) data from all the large Member States demonstrating that discounts granted by the two parties to the concentration varied on three dimensions:

– (i) for a given customer, discounts varied over time;

– (ii) for a given customer, discounts varied from album to album;

– (iii) for a given album, discounts varied from customer to customer.

129 Although the annex to the statement of objections consisting of charts reproducing the average invoice discounts granted by the parties to the concentration to each of their top 10 common retailer customers (that is to say, for any given year, total invoice discounts to a given customer divided by total gross sales to that customer) in the United Kingdom, Germany, Italy and Spain between 2000 and 2003, showed the broad stability of discounts over time (point 88 of the statement of objections), the parties to the concentration pointed out, on the basis of the same charts, that their respective treatment of certain customers in the United Kingdom, Germany and Spain was markedly different.

130 As regards the applicant’s observation that ‘[i]t is far from clear … that differences in discounts obtained by the top 10 customers reflect differences in treatment rather than differences in the relative performance of the portfolios of each of the … parties [to the concentration]’, the Commission observes that if that is far from clear, even to an observer with access to complete data, it is difficult to imagine how the majors, in conditions of tacit coordination and quite imperfect market information, could eliminate ‘interference’ caused by portfolio mix in order to get an accurate picture of underlying discount practice or policy.

131 The annex to the defence reproducing evidence provided by Sony and BMG covering a five-year period, shows, in each of the five large Member States, the variation within what are sometimes quite wide ranges in the invoice discounts granted by each of them to their top 10 customers for their respective top 20 single CD albums in a given year, which represent an important part of overall turnover for the majors, so that observable, equivalent treatment at the level of both PPDs and discounts would be an essential component of any coordination of net prices. Each table tends to show, for a given major in a given country, that certain customers received quite divergent discounts in a given year or over a number of years for those best-selling albums and also that there were a number of marked differences in the highest and/or lowest discounts granted to different customers in a given year, even for customers in the same category (for example, wholesalers, specialist retailers or supermarkets).

132 Furthermore, comparison of the tables in that annex for Sony and BMG for any given country permits the conclusion that the discounts granted by each of them to any given customer in any given year often varied considerably as regards both the highest and lowest discounts granted during that period and the range between those two figures.

133 The Commission questions the relevance of the applicant’s conclusion that the tables reveal ‘interesting regularities’ and observes that any such ‘regularities’ do not detract from the importance of variation in discounts as evidence of the complexity and opacity of net pricing.

134 The annex presenting a breakdown into bands of the discounts granted by the parties to the concentration for their respective top 20 CD albums between 1998 and 2003 in the five large Member States, permitted the Commission to ascertain the proportion of sales of their respective top 20 single CD albums to all customers made by each of the two majors at a given discount (expressed in narrow bands of 2.5%) by reference to the list prices (PPDs) of the albums concerned. More generally, the vertical column for each year in those tables shows that, whatever the year or the country, neither of the two majors followed a uniform discounting practice even for that restricted selection of their best-selling albums. The horizontal rows, relative to the different narrow bands of discounts, also show that the respective discounting practices of both parties to the concentration varied over time, from year to year.

135 Furthermore, one of the annexes to the defence shows that, for the year in question, the breakdowns of the discounts granted by Sony and BMG respectively on their top 20 albums in 2003 were appreciably different.

136 The applicant’s observation that the differences in the ranges of discounts do not preclude their being based on a known series of rules rests on the false presumption that if a set of rules were known, that would suffice for all of the majors to be confident that those rules would be respected.

137 The Commission observes that the correlation analysis carried out by the applicant relates to a single party’s discounts over time and not to alignment between the parties to the concentration. Furthermore, even if that analysis showed that the discount structures of each party to the concentration were relatively stable over time, in spite of changes in the business mix, that would actually confirm the Commission’s argument that figures for average net prices can mask considerable fluctuations at the level of albums or customers. Last, contrary to the applicant’s contention, the narrow discount bands (of 2.5%) in the charts in fact make the analysis less sensitive to small changes in discounts.

138 The Commission also contends that the applicant’s observations to the effect that some of the charts show, rather, stability over time or a high correlation factor between the parties to the concentration are unfounded.

139 The annex setting out, for the five large Member States, the distribution of net prices to the top five customers of each of the parties to the concentration, shows:

– (i) that the distribution of net prices is quite different for the two majors, both in general and for specific customers; and

– (ii) that the way in which purchases by different customers from a given record company are divided between different net price bands varies considerably. This observation holds true even for customers in the same category (such as wholesalers, specialist retailers, supermarkets), to the extent to which more than one customer in a given category features in the table.

140 The Commission agrees with the applicant that variations in the distribution of the net prices paid by important customers to the different majors may be attributable to differences in their purchasing patterns and in the majors’ product mix. However, those variations are by no means irrelevant. Even if a major were able to discover the different net prices paid for different albums of another major by a common customer (which, on the available evidence, seems unlikely), it would be unable to tell whether those prices reflected adherence to the necessarily complex rules posited by the applicant or deviation from those rules, unless it had, at the very least, much more information about the albums to which those prices related.

141 Furthermore, if product mix and varying levels of success