Summary of Commission Decision of 3 October 2007 declaring a concentration compatible with the common market and the functioning of the EEA Agreement (Case COMP/M.3333 — Sony/BMG) (Text with EEA relevance)
Date: 2007-10-03
Institutions: European Commission
Subjects: European Economic Area, audiovisual industry, competition law, economic concentration, merger control, music

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Summary of Commission Decision

of 3 October 2007

declaring a concentration compatible with the common market and the functioning of the EEA
Agreement

(Case COMP/M.3333 — Sony/BMG)

(Only the English version is authentic)

(Text with EEA relevance)

(2008/C 94/09)

On 3 October 2007,
the Commission adopted a Decision in a merger case under Council Regulation (EEC)
No 4064/89 of 21 December 1989 on the control of concentrations between undertakings (1), and in particular
Article 8(2) of that Regulation. A non-confidential version of the full Decision can be found in the authentic language
of the case and in the working languages of the Commission on the website of the Directorate-General for Competition,
at the following address:

http://ec.europa.eu/comm/competition/index_en.html

I. THE PARTIES AND THE OPERATION

1.

2.

Sony is globally active in music recording and publishing, industrial and consumer electronics, and
entertainment. Bertelsmann is an international media company active in music recording, TV and radio
production and broadcasting, publishing of books, magazines and newspapers, print and media
services, as well as book and music clubs.

The re-notified concentration comprises the creation of the recorded music joint venture Sony BMG
which has been completed following the Commission's clearance decision of 19 July 2004.
Bertelsmann contributed the worldwide recorded music business of
its wholly owned subsidiary
Bertelsmann Media Group (‘BMG’); Sony contributed its worldwide — with the exception of Japan —
recorded music business which had been operated by Sony Music Entertainment.

II. PROCEDURE

3. On 9 January 2004, the Commission received, pursuant to Article 4 of Regulation (EEC) No 4064/89,
the notification of the proposed Sony BMG recorded music joint venture. On 19 July 2004, the
Commission declared the concentration compatible with the common market. Bertelsmann and Sony
now jointly control Sony BMG which operates as a full function joint venture. According to the noti-
fying parties, implementation of the concentration was gradual and became fully completed in 2006.

4. On 13 July 2006, the Court of First Instance of the European Communities annulled the Commission's
decision (2). On 31 January 2007, the Commission received an up-date of the initial notification. On
1 March 2007, after examination of the notification, the Commission concluded that the notified
operation falls within the scope of the Regulation (EEC) No 4064/89 and raised serious doubts as to its
compatibility with the Common Market and the functioning of the EEA Agreement.

5.

6.

By decision of 22 March 2007 pursuant to Article 11(5) of Regulation (EEC) No 4064/89, complemen-
tary information were requested to the notifying parties. The parties provided the requested informa-
tion on 26 June 2007, and such re-started the Phase II timetable.

III. THE RELEVANT PRODUCT MARKETS

Both parties are active in the discovery and the development of artists (so-called A&R: artist and reper-
toire) and the subsequent marketing and sale of recorded music. Sony BMG has not engaged in related
activities such as music publishing, manufacturing and distribution. Sony's and BMG's activities in these
fields remained with the parent companies or have been divested.

(1) OJ L 395, 30.12.1989, p. 1.
(2) T-464/04 (Impala/Commission). The notifying parties have lodged an appeal against the CFI judgment (C-413/06 P).

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1. Physical recorded music

7.

8.

The notifying parties consider the relevant product market to be the market for recorded music
(i.e. discovery and development of artists, and the promotion, sales and marketing of recorded music)
for all types of music. No subdivision along categories (international pop, local pop, classical music and
compilations) is considered meaningful.

From a demand side perspective, end-consumers make purchasing decisions based on a number of
criteria, among which type of music (genre), international v national, new release v back catalogue,
individual artist v compilation, single v album and whether the music is released subject to a promo-
tional campaign. From the supply side, record companies may sign artists and sell records across a
range of different genres. Some independent labels, however, specialise in certain specific genres. The
market investigation shows that all styles and genres are collectively included in a broad market subject
to different musical standards and influences. Most record stores sell a diverse range of music. More-
over, clear and consistent definitions of categories and genres are difficult to find as there are many
similarities between all of them (producers, outlets, customers, contract mechanism) which illustrates
that distinguishing between different markets is not relevant. As regards compilations, there is a general
view that they form a separate market from a demand side perspective, but the suppliers (recording
companies) are divided on this issue. Based on these considerations, the Commission concludes that
the relevant product market for physical recorded music includes all physical CD albums, irrespectively
of their genre or their compilation/single artist status.

2. Recorded Music in digital formats

9. Digital music is delivered either online over the Internet or via mobile networks to the consumer in
various forms, including downloads (of tracks, albums and master tones), subscription services and
streaming. As Sony BMG is mainly active on the wholesale level — licensing its catalogue to digital
music providers — the relevant market is the wholesale market for digital licensing of music.

10. As in previous decisions, the Commission concludes that there is an emerging but separate market for
the online delivery of music,
including streaming and downloading of music. Whilst digital music
services compete to a certain extent with physical sales of music, the market investigation indicated
that the physical market is not likely to be more than partly substituted by digital sales. From the final
user perspective, digital music can therefore to be considered as a complement to physical music,
rather than a substitute. From the supply side point of view, the structure of digital music services is
different from physical retail in terms of organisation, as separate divisions for physical and digital
music exist at the major record companies in order to handle the distinct value chain of digital music
compared to the physical market. Also, the technical and commercial conditions negotiated between
digital music services are different from those prevailing in the physical market. Moreover, marketing
and cost structure in the digital market differ significantly from the physical market. It can thus be
concluded that, both from the demand- and supply side, the wholesale market for licensing of digital
(online/mobile) music constitutes a separate market from the wholesale market for physical recorded
music. The Commission left open whether mobile music might constitute a distinct product market
from online music due to limited demand-substitutability, in particular on the level of end-consumers.

IV. THE RELEVANT GEOGRAPHIC MARKETS

1. Physical recorded music

11. The notifying parties consider music recording to be national in scope, as pricing (including discounts)
and the sale of recorded music are predominantly carried out on a national scale. Furthermore, there is
a strong local artist demand in all Member States and the discovery and development of new artists is
to some extent a local business. The Parties also point out that as only few major customers have an
international presence, marketing mainly takes place nationally and the shares of different record
companies vary among different Member States. In addition, many independents are only present in
one or few Member States.

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12. As in previous decisions, the Commission found that the relevant geographic market has both national
and international characteristics. The results from the market investigation still point in the direction of
national markets. In particular, national repertoire (i.e. other than Anglo-American repertoire) is typi-
cally only attractive to a larger audience in the home country or the countries having the same
language, the pricing, as also submitted by the notifying parties, is different from country to country,
and the marketing is done on a national basis. Based on these considerations, the Commission
concludes that the relevant product market for physical recorded music is national.

2. Recorded Music in digital formats

13. The geographic scope of digital distribution of music could be considered larger than national as the
internet does not recognise borders and allows music to be available to consumers ‘anytime, anyplace,
and anywhere’. However, the market investigation has indicated — in line with the 2004 Decision —
that the market is still national in scope. On the wholesale level, licences are mostly granted by the
record companies to music online providers for exploitation in a certain (national) territory. On the
retail level, the market investigation has indicated differences in the structure, demand, evolution and
dynamics of the digital market between the relevant Member States that would support the finding of
national markets. The market for licensing of digital music can therefore be considered as national in
scope.

V. ASSESSMENT

1. Market for Recorded Music in digital formats

1.1. Absence of non-coordinated effects

14. Whilst the recorded music industry was already concentrated prior to the merger in 2004, Sony BMG's
market shares remain below a level that could generally be considered as constituting a single dominant
position in any of the national markets. Also, the merger has not led to competitive issues with regard
to market foreclosure of digital music retailers, portable music player manufacturers or independent
record companies. Specifically with regard to the independents, the digital market can be considered as
representing an opportunity for independents to reach demand without having to rely on distribution
and traditional retailers.

1.2. No evidence of the creation or strengthening of a collective dominant position in the market for digital distri-

bution of music

15. The market investigation focussed on whether the concentration has led to a creation or strengthening
of a collective dominant position on the wholesale market for licensing of music to digital music provi-
ders. As online/mobile music providers need to have licences with all majors in order to be able to
offer a repertoire as complete as possible, the question investigated is whether the Sony BMG merger
could, in an already concentrated market, be seen to have enabled or significantly facilitated the majors
to collectively dominate the wholesale licensing in the digital music market.

Market characteristics

16. Tacit collusion would generally be considered to be incompatible with the dynamic and unstable nature
that characterises the digital market. The development of the digital market is uncertain as the business
models are diverse and evolving. Whilst the digital market attracts frequent new entry, demand is
highly concentrated as Apple's online music service iTunes is the leading digital music retailer in all
national markets, and such provides iTunes with a certain degree of countervailing buyer power. The
pricing strategy that iTunes has introduced in the digital market — and which has been replicated by
most of the other music service providers — is to sell all music at a standard price per track and such
significantly limits the ability of the majors to differentiate their pricing at the wholesale level.

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Conditions for a finding of collective dominance

17. The market investigation has verified whether the conditions for a finding of collective dominance are

met in the digital music market.

Transparency

18. The investigation has considered, in particular, if the predominant retail pricing model can be seen to
provide a direct or indirect focal point for the majors to coordinate around. As to the ability for majors
to monitor adherence to any such terms of coordination, it has been investigated to what extent the
majors have aligned price levels in their contracts with digital music providers and, where a certain
degree of wholesale price alignment could be observed, whether such was the likely result of coordina-
tion or rather of competitive factors such as the bargaining power of large digital retailers or of the
nascent state of the digital markets. It appears from the Commission's investigation that the majors
seek to individually maximise their returns on digital music. The majors apply different prices, different
price structures and use different business models, and this differentiation is increasing.

19.

It appears from the investigation that wholesale pricing structures and agreements have increasingly
gained in diversity and complexity over the past 36 months. This increased complexity follows from
the dynamics of negotiation between the majors and the digital retailers, leading to more customised
contracts that reflect the market position of the retailer and the valuation of the service it provides.
These price structures are also more frequently reviewed and renegotiated. Furthermore, there is
increasingly more sophisticated differentiation between categories of content. Also, there is an increased
differentiation between the contracts concluded with digital retailers on the national level as the local
management of
the majors in a given Member State obtains more influence in negotiating the
contracts. More precisely, the market investigation has pointed to a number of elements that would
considerably limit the ability of the majors to identify deviation regarding any tacitly coordinated
wholesale pricing on the basis of such observed retail prices. Overall, there is a tendency towards
increased wholesale price sophistication such as (i) discounts and volume related prices; (ii) a two tier
pricing system; (iii) advance payments; (iv) usage restriction variations; (v) bundled content.

20. Quite apart from these features, it was investigated whether the observed level of price alignment is in
itself sufficient to consider the online market segment transparent. Through an analysis of the major's
historic price data and contracts with digital music retailers, the Commission has assessed to what
extent the majors apply aligned price levels in their contracts with digital music providers in the investi-
gated 15 Member States. This investigation provides information on the level of transparency and the
evolution of price structures, possible alignment between the majors in terms of price and other
contractual conditions, and to what extent the merger has affected these contractual conditions.

21. With regard to the different market segments, price variability is most pronounced for subscription
services, streaming, tethered downloads and advertising based music services for which a wide variety
of business models have developed. For these applications, wholesale pricing and other contractual
conditions are not transparent and there is no alignment between the majors. There is also very signifi-
cant price variability for mobile applications (master tones, mobile downloaded tracks and videos).
There is no overall convergence of the major's pricing levels as most majors apply different rates to the
different mobile music providers within the same country. Secondly, on the level of the individual
mobile music provider, most majors apply considerably different prices. Thirdly, prices are increasingly
differentiated on the basis of the volumes sold.

22. For online downloads there is a high degree of price differentiation for premium/mid price single tracks
and albums. For standard downloads (tracks and albums), three categories of retailers with varying
levels of price variability were identified. For the majority of the digital music providers in all assessed
Member States, there is a relatively wide divergence on wholesale prices applied to a given music
service

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provider and these differences can fluctuate over time. For a second category of music service providers,
there is a more pronounced level of price similarity, whereby the currently applied wholesale prices
show divergence of between 10 % and 15 %. Also, for these music service providers, the ranges of
price alignment vary considerably between the different providers in all assessed Member States. There
is no consistency in the price level applied by the different majors for a given retailer; and these posi-
tions may vary over time, whereby the most expensive major for a given music service provider
becomes the least expensive for that provider over a period of 24 months. Such findings are hardly
compatible with a theory of tacit collusion.

23. Some price alignment can be observed for the iTunes music service. Whilst certain of the majors
endeavoured to persuade Apple to accept differentiated prices (in order to increase prices for releases
with high demand and vice versa) when launching iTunes in Europe, Apple has reportedly refused to
abandon its ‘one price fits all’ pricing policy. In view of the very strong demand position iTunes has
acquired (with, for example, more than 80 % of one of the major's 2006 online download revenues in
the United Kingdom, Ireland, Austria and Belgium), the negotiation power of iTunes appears to have a
strong influence on prices. In addition, in the United Kingdom, which is the most advanced digital
market in the EEA, iTunes UK applies the same ‘one price fits all’ retail pricing structure (albeit at a
higher price than in the euro zone), while certain of the majors apply wholesale prices that are signifi-
cantly different from other majors. It cannot be explained under an agreed collusive scheme why some
majors would accept to apply a lower wholesale price than the other majors, in particular seen that
these price differences were maintained by those majors that have entered into new contracts with
iTunes.

Retaliation

24. The second condition for a finding of collective dominance requires that there is some form of deter-
rent mechanism in case of deviations. The market investigation has not pointed to the existence of a
credible retaliation mechanism that would force the majors to remain within the boundaries of any
agreed collusive scheme. The fact that the wholesale prices of the majors can vary considerably in
opposite directions without any observable reaction of the other majors is not indicative of a trans-
parent market where deviation is easily detected and retaliation can take place to reinstate adherence to
the tacit collusion. In addition, the different majors have in the past 12 months, if anything, applied
more divergent short and long term strategies than in the past. The investigation has not brought
evidence that could explain how such unilateral actions from certain majors would be compatible with
a collusive scheme, or why these actions, that affect an important part of the digital market, would be
left without retaliation.

Countervailing abilities

25. For coordination to be sustainable, the reaction of outsiders — such as current and future competitors
not participating in the coordination, as well as customers — should not lead to jeopardising the
results expected from the coordination. As for potential competitors, Independents exert only limited
competitive pressure on the majors. As for customers, iTunes has acquired a relatively strong bargaining
position vis-à-vis the majors as far as online downloads are concerned (and has successfully objected to
any wholesale price differentiation for single track). On the other hand, the market investigation clearly
indicates that a digital music provider must have access to the repertoire of all the majors in order to
match the demand for chart hits. As there is no substitution for chart material, this dependency affects
the countervailing buyer power of music service providers.

26.

It can be concluded that there is a balance of power between the majors being able to leverage their
indispensable content and iTunes (and increasingly a number of strong players such as telecom opera-
tors). Taking into account that the degree of buyer power is still significantly more important than
what can be observed in the physical market the customers in the digital market could indeed jeopar-
dise to a certain extent the benefits that any coordination could bring to the majors.

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1.3. The effect of the merger

27. Whilst the merger has reduced the number of competitive relationships, the market investigation has
not provided evidence that the merger has enabled or facilitated tacit coordination. In addition, the
contract and price data show that the merger has not led to an overall increase of wholesale prices for
BMG or Sony content.

1.4. Conclusion

28. On the basis of all the above, the merger has neither led nor will lead to the creation or strengthening
of a collective dominant position of the four remaining majors in the markets for licences for digital
music in any of the EEA countries, as a result of which effective competition would be significantly
impeded in the common market or in a substantial part of it.

2. Market for Recorded Music in physical formats

2.1. Absence of non-coordinated effects

29. The markets for recorded music in all affected countries are characterised by the presence of four major
record companies (Sony BMG, Universal Music Group, Warner Music Group, and EMI) which together
hold 80 % of the market, and a large number of significantly smaller independent record companies.
Universal leads before Sony BMG, EMI and Warner. The market share of Sony BMG does not allow the
company to reach a single dominant position in any relevant market.

2.2. No evidence of the creation or strengthening of a collective dominant position in the market for physical

distribution of music

Coordination at the level of non-price items

30. The following theories of coordination that suggest that major record companies might restrict the
access of independent record companies to retailers on non-price aspects of the market for recorded
music have been analysed and rejected. Moreover, it is not obvious that these topics would restrict
competition between majors themselves.

— Access to shelf-space: The market investigation confirmed that hits released by independent record
companies benefit from similar conditions as hits from major companies. Shelf space is allocated
independently by retailers, on the basis of their own evaluation of albums sales potential.

— Access to airplay: Most successful radios in Europe broadcast music on the basis of a playlist. All
record companies compete to be registered on such playlists as regular airplay is one of the factors
supporting sales. Most competitors reported that TV or radio stations, in their decisions on the
allocation of air-time to music titles did not particularly favour recording companies belonging to
their group. Finally,
the percentage of combined airplay for independent record companies
increased in 10 out of the 15 EEA countries analysed during the 2003-2005 period.

— Charts rules: Whereas the existence of charts can indeed increase transparency by providing regular
information to all market observers on how CDs albums of competitors perform, the Commission
investigation did not find any instances of majors using chart rules as an opportunity to deny the
access of artists from independent record companies to the charts. In addition, the Commission
notes that minimum prices do exist in 12 countries for CD albums to enter the charts, but
consider that these prices are too low to hinder competition between record companies on setting
different prices and/or constituting focal points for a coordinated approach by majors.

— Release dates: Sony BMG has recognised that decisions on its albums' release dates are influenced
by release dates of competitors' albums. Release dates are also often publicised and therefore trans-
parent or relate to specific events (e.g. Christmas sales). However, release dates are often postponed
and in any event, the behaviour of majors in this regard can hardly be qualified as collusion and
seems more based on competition, with each firm trying to optimise its release dates.

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— Publishing and recording rights: All majors have a sister company active in music publishing, apart
from Sony BMG, since Bertelsmann sold in 2007 its publishing division to Universal. Sony/ATV, a
publishing joint venture between Sony and Michael Jackson, reaches a significantly lower market
share than its competitors. Moreover, the Commission investigation concluded that because of the
existence of collecting societies, publishing companies are not in a position to exercise market
power in the market for recorded music.

— Cultural diversity: The market investigation showed that all record companies are engaged in intense
competition for discovering and signing new artists. Major record companies have reduced the
number of artists on their roster, but this decrease followed the drastic decline in demand and
started before the merger of Sony and BMG. The share of local artists in record sales has signifi-
cantly increased in the majority of Contracting Parties to the EEA Agreement in the past few years.
The increased share of local artists is retailed through both traditional retail channels and the
internet, with the latter acting as a forum for known and unknown artists increasingly to display
and sell their music directly to end-customers without the use of traditional retail channels. It can
thus be concluded that the merger of Sony and BMG had no negative impact on cultural diversity
at the level of creation, recording, distribution and retail.

Coordination at the level of price items

31. The following theories of coordination that, if applicable, would suggest that major record companies
coordinate to stabilise the net wholesale prices of physical CD albums at supra-competitive prices have
been analysed and rejected.

Coordination at the level of budget

32.

It has been suggested to the Commission that the yearly budgets of majors would be used as focal
points of coordination for them to control the average annual discounts of their competitors or as a
signal to all retailers (and through them to all competitors) that the tacit coordination that was taking
place for a given year, would be re-conducted for another subsequent year.

33. The Commission found that budgets are not prepared for separate customers on a regular basis by
record companies. Retailers notably reported that they are not informed of record companies' total
discount budgets allocated to them. The Commission also found that the budgets prepared by record
companies are confidential documents and the investigation did not provide any evidence that these
budgets are disseminated between the majors or that they otherwise could be used as focal points for
coordination. In addition, the Commission considers that whereas budgets are instruments to forecast
sales and discounts, they are poorly appropriated for controlling discounts granted to customers on a
regular (e.g. monthly, weekly) basis. Finally, due to uncertainty of e.g. sales forecast, monthly budgets
are often ‘over-spent’ and the Commission did not find indications of either reduced availability of
discounts towards the end of budget periods or retaliation following the observed and regular deviation
from budgets, neither of which is consistent with a theory of tacit collusion.

Coordination at the level of each title pricing

34. Under the theory that collusion takes place at the level of each title, thousands of albums of competi-
tors would need to be monitored by majors at any point in time. The market investigation found that
whilst it may be feasible for majors to collect information on a few specific albums by focusing discus-
sion with retailers, it seems very unlikely that record companies could obtain exhaustive and precise
information on the pricing of all their competitors' albums, or even on all their chart albums. The
market investigation has also not supported the finding that majors actually attempt to collect such
information on anything close to a systematic basis. In addition, PPDs, campaign discounts and retail
prices evolve constantly and would require a daily or at least weekly monitoring leading to a massive
set of information elements to be gathered. Such a database would be highly cost-consuming, whilst
remaining in all likelihood largely incomplete.

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Coordination at the level of pricing policy (stabilisation of current business model)

35. A theory of harm has been suggested to the Commission whereby all major record companies coordi-
nate themselves at the level of their general pricing policy. This would notably imply that all majors
follow the same pricing patterns, involving a level of flexibility necessary to adapt album prices to fluc-
tuations in demand. Under this theory, majors would enjoy a stable and predictable business framework
in the sense that pricing for comparable new releases or for comparable catalogue titles would be rela-
tively similar. It would also be a guarantee that the evolution of prices of albums would follow similar
rules. A deviation from the general pricing policy would be spotted by competitors as soon as it is
systematic and applies to a large category of albums.

36. The Commission believes that it is inappropriate to qualify the above theory as one of coordinated
effects on the market for recorded music, notably because such a theory would leave significant margin
for different majors to develop many alternative pricing schemes and thus cannot be distinguished
from competition.

Coordination on prices at and shortly after the release date

37. The bulk of sales of majors are realized by chart albums during the first weeks after release. Hence, a
coordination of majors covering chart album prices during the early post-release period would cover a
level,
significant part of majors' activity and revenue. The analysis first conducted at the general
including all affected markets, has pointed to a number of weaknesses of this theory which would be
hardly compatible with tacit collusion. The possible terms of coordination would notably have to
address at least the following issues:

How are PPDs selected by the majors?

The investigation shows that not all the majors use the same PPDs and also that the number of ‘main
PPD's’ each major uses varies over time. It further does not appear that there is a clear rule for exactly
which of its main PPDs a major allocates to each new release. It is not clear that this level of ‘freedom’
could be explained as compatible with tacit collusion. In addition, it is unclear, if coordination was
taking place, why the different majors would still use different main PPDs within a range of several
euros, causing majors with lower main PPDs to make a loss for a significant portion of their sales
when compared to the other majors.

For which period after release PPDs have to remain stable?

The investigation shows that the period after release during which an album PPD is stable varies from
album to album. Again, in the absence of any apparent rule, it is not clear whether the liberty for each
major to decrease PPD of an album ‘freely’ could be compatible with tacit collusion.

Which rule is applied to discounts during the above period?

The Commission's analysis highlighted that campaign discounts are only applied to some albums and
that their level varies between albums and retailer, as well as during the life cycle of the album. These
campaign discounts apply to a significant proportion of new releases and significantly impact net
wholesale prices. Moreover, the investigation did not find relatively simple and recurrent patterns
behind the application of these campaign discounts in the early life of albums to significant customers.
The absence of such patterns is not consistent with a hypothesis that coordination among the majors
has taken place.

38.

In addition, in order to prove a collective dominant position, the coordination would need to meet the
Airtours criteria:
transparency to spot deviations, existence of a credible retaliation
mechanism and inability of customers or competitors to jeopardize collusion.

sufficient

Lack of transparency

39. PPDs are only partially transparent and the Commission found that they are not systematically moni-
tored by the majors. In most countries, PPDs are not publicly available anymore. They are printed in
promotional material distributed to retailers. These retailers could in theory share such material with
other record companies but the market investigation did not provide evidence of any systematic resort

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to such practices. In some countries, PPDs or PPD codes are also available via websites accessible by
record companies and retailers. The parties, however, submitted that they do not use such websites.
Nevertheless many retailers acknowledged that they partly use pricing information from one major to
negotiate with other majors. As a result, although it seems possible for Sony BMG to collect PPD infor-
mation through contacts with retailers, the information that could be gathered in this way would likely
be incomplete and its reliability would be dubious. It cannot therefore be concluded that PPDs can be
reliable focal point for a theory of coordination.

40. Discounts are even less transparent. They are negotiated directly by each major with each customer on
a bilateral basis. Although retailers use commercial information from one major to negotiate with its
competitors, the majority of retailers acknowledge that majors do not know each other's discounts.
Contracts signed between the majors and retailers generally contain different clauses in terms of
discount structure and discount rates. It could be argued that file discounts granted to customers are
very stable year on year and might be more easily observable. Nevertheless the Commission investiga-
tion also found it was not possible to derive any recurrent predictable pattern for the way in which the
different majors apply campaign discounts and campaign discount levels to different retailers (for new
albums as well as for mature catalogue albums). In addition, these campaign discounts are only partly
observable at the retail level as campaign discounts can aim at pushing retailers to build stock or to
grant better visibility to albums. They are not systematically passed on to final consumers and as such
are not systematically observable with regard to their application. They are even less observable with
regard to their magnitude. It can be concluded that the limited transparency of discounts renders any
monitoring of a tacit coordination very difficult.

41. With regard to the possibility to reverse-engineer the net wholesale price of CD albums from their retail
prices, the market investigation showed that after the release of a new album, the retailer mark-ups are
impacted by a variety of factors and are therefore not regular. Even for new releases, where mark-ups
applied by retailers are more stable, the investigation showed that the level of transparency would not
allow deducing the net wholesale prices of competitors' albums with a sufficient precision. This implies
that reverse-engineering is very difficult for albums in general, as confirmed by a majority of retailers.

42.

the investigation indicates that

transparency that characterises PPDs,
In conclusion,
discounts and mark-ups applied to retail prices does not allow verifying that the other majors are
respecting any commonly agreed pricing policy for all albums, or even during the period after initial
release.

the level of

Retaliation

43. The only two forms of retaliation that have been proposed to the Commission are either the exclusion
of the deviating company from compilation joint ventures or other joint activities, and second the
termination of the tacitly coordinated behaviour with respect to prices and releases of albums. The
Commission did not identify in any affected country any action that could be considered as retaliation
via exclusion of compilation deals or as activities that were intended as retaliating returns to competi-
tive behaviour. Although the threat to apply a credible retaliation mechanism can constitute a sufficient
deterrent mechanism, the absence of such observations in circumstances where there has been no
observable alignment consistent with terms of coordination confirms that such mechanisms would not
constitute credible means of retaliation.

Reaction of competitors and customers

44.

It appears that independent record companies are unlikely to be able to effectively react and jeopardise
the expected outcome from any coordinated behaviour between majors. On the other hand, there
seems to be enough, and increasing, scope for at least a sizeable proportion of customers to be able to
destabilise coordination by majors by reducing purchases and advertising on their products. It is there-
fore unlikely that coordination (which the Commission found no indication of in the market investiga-
tion) could be sustained under such circumstances.

C 94/28

EN

Official Journal of the European Union

16.4.2008

Conclusion

45.

In conclusion, the market investigation did not find evidence regarding coordination at the level of the
selection of PPDs. The analysis of the discount stability suggests, even under the assumption of full
transparency of PPDs, that most of the time a significant number of sales transactions do not follow a
simple and stable discount pattern that could be inferred by a knowledgeable market participant based
on public information. PPDs are only partially transparent, and there are indications that it is not
possible to reverse engineer net wholesale prices from retail prices with the necessary level of certainty.

2.3. Conclusion

46. The Commission investigation established that the merger has neither led nor will lead to the creation
or strengthening of a collective dominant position of the four remaining majors in the markets for the
physical recording of music in any of the EEA countries, as a result of which effective competition
would be significantly impeded in the common market or in a substantial part of it.

VI. CONCLUSION

47. The decision concludes that the proposed concentration will not significantly impede effective competi-
tion, by creating or strengthening a dominant position, in the Common Market or in a substantial part
of it. Consequently, the concentration is declared compatible with the Common Market and the EEA
Agreement, in accordance with Article 8(2) of the Regulation (EEC) No 4064/89 and Article 57 of the
EEA Agreement.