EU Approves Sony-BMG Merger

In a shift from its previous position, officials for the commission said they had found no reasons to prevent the 50:50 joint venture, but added they planned to closely observe the increase in mergers in the music industry and to monitor developments together with the US Federal Trade Commission.

In February, the commission had opened an inquiry into the deal between Sony's music arm and Bertelsmann Music Group (BMG) over concerns that a combined group would dominate the market and lead to higher prices for consumers. The new company, to be called SonyBMG, will be the world's second largest music label, behind Universal Music.

If the merger actually goes ahead, the market will be carved up between four instead of five majors: Vivendi's Universal, the newly-created SonyBMG, Warner and EMI. Together they would share around 80 percent of European recorded music sales.

Sources say the German-Japanese tie-up should also win approval from the US Federal Trade Commission within days.

The European and US competition authorities have run parallel investigations into the merger, which will create the world's largest music company in terms of market share according to 2003 figures.

The 50:50 merger will bring together Sony stars such as Barbra Streisand and Beyonce and BMG stars, including Elvis Presley and Christina Aguilera.

Massive job cuts expected

The Japanese and German parent groups argue that their businesses need to join forces to tackle the crisis in the global music industry faced with both pirate CDs and an explosion of illegal music downloading.

But the latest case of media consolidation comes at a cost. According to reports, Sony and BMG plan to axe a quarter of their joint workforce, or some 3,000 jobs, once the tie-up has been approved.

At SonyBMG the overhaul will produce one-off costs of $300 million to 350 million dollars (€244 million to €284 million), mainly covering severance terms for a large portion of the group's employees, the Financial Times reported last week.

Executives at Bertelsmann, hoped to achieve 85 percent of the cutbacks by next June, it added. But detailed plans for cost-cutting measures will begin only after competition authorities cleared the merger.

Brussels does an about-face

The Brussels green light comes four years after the European Commission effectively blocked another music tie-up, between EMI and Time Warner.

Initially the Commission appeared to be preparing a red light for the Sony/BMG tie-up as well. In May EU competition commissioner Mario Monti (photo) said in a preliminary assessment that it would be "incompatible" with EU rules. Many also expressed concern that such a deal would lead to fewer consumer choices on the market and endanger the nascent legal online music downloading trade.

But the man who made a name for himself after taking on Microsoft softened his tone after closed-door talks with the two sides and several independent labels in Brussels. Inside sources say Monti apparently secured guarantees that the merger would not lead to reduced competition and thus higher prices for consumers.

Critics of the deal and independent recording companies remain concerned. Impala, an umbrella group representing more than 2,000 independent labels said the merger would further reduce smaller companies' ability to give up-and-coming artists exposure. It has threatened to take legal action to have the Brussels decision overturned.

BMG is in a strong position as it prepares for the tie-up. It posted record operating profits of €30 million ($37.4 million) in the first half of this year, Der Spiegel newsmagazine reported

in its latest edition.

The result, the best six month figures in its history, puts BMG in a strong position for negotiating the deal with Sony Music, with the two sides expected to meet this week on a reorganization after the Brussels decision.

Andreas Gravermeyer, spokesman for Bertelsmann AG, said the the entire industry will benefit from the merger, because it will "create a recording music business better able to serve artists and consumers in the rapidly changing market."

As to Bertelsmann's own benefits from the tie-up, Gravermeyer said after the deal goes through, the company will enjoy "a leading market position in all its core businesses."