Universal/BMG Music Publishing (European Commission, phase II)
Advisory Services
The Situation
In September 2006, Universal -- a US-based company owned by French group Vivendi, and a leading player in the music recording and music publishing business -- proposed to acquire the worldwide music publishing activities of BMG, a subsidiary of the German media company Bertelsmann.
Music recording relates to the rights of the record company and the singer in the song performance, while music publishing relates to the rights of song writers (authors), i.e., of composers and lyricists. Universal was already the strongest player in music recording, and post-merger it would also become the largest music publisher.
The transaction was notified to the European Commission on 3 November 2006. The Commission initially raised doubts in a number of different areas. Its in-depth investigation focused on the concern that Universal could exert control over a large percentage of titles via its (fully or partly owned) music publishing copyrights based on the song writers' works and via its recorded music rights based on the individual recordings. In a number of countries, Universal would control more than half of the chart hits in this way, and the Commission raised concerns that it could thereby become a "must-have" product for all online and mobile music services.
Shortly before the notification of this merger, the Court of First Instance (CFI) in Impala annulled the Commission's 2004 clearance of the recorded music joint venture between Sony and Bertelsmann, and the Commission's re-investigation of the Sony/BMG joint venture overlapped considerably with its Universal/BMG music publishing inquiry.
NERA's Role
NERA worked with Universal's legal advisors, SJ Berwin, throughout the investigation by the European Commission, conducting economic analyses and assisting in the preparation of submissions and presentations before the Commission.
NERA provided economic support on a wide range of complex issues that arose in the course of the inquiry. In relation to the Commission's central concern, NERA performed a thorough investigation of the theoretical and empirical implications of the combination of music publishing and recorded music activities, including an analysis of the economics of minority stakes, and an application of the Commission's theory of "control shares" to the calculation of potential divestiture remedies.
In addition, NERA provided a coherent and consistent approach to a number of different indexation, weighting and sampling questions that arose in connection with much of the quantitative analysis throughout the investigation.
NERA also undertook detailed empirical testing of a number of the Commission's initial concerns, analyzed the nature of "must-have" products, described differences in the patterns of exploitation between traditional and digital media, and examined patterns in the contracting and development of new artists.
The Result
The Commission cleared the merger on 22 May 2007 subject to a divestiture remedy, but without issuing a Statement of Objections.
Ultimately, the Commission's only concern related to the evolving market for the online exploitation of music publishing rights, and arose from the recent development by which music publishers had started to withdraw their respective rights for the online exploitation of Anglo-American repertoires from the traditional collecting societies system. However, in line with the Commission's theory of "control shares," the merger increment effectively excluded those BMG publishing rights for which Universal already controlled the corresponding recording right and/or a corresponding co-publishing right. Accordingly, the Commission's concerns were limited to approximately 35-45% of the revenue-based market share increment. In order to remove these concerns over the incremental control share from acquiring BMG's publishing rights, Universal committed to divest a number of catalogues which included Anglo-American copyrights and contracts with authors, on an EEA wide basis.
NERA also worked on the related investigation before the US Department of Justice, which cleared the acquisition unconditionally, following a second request.
