The European Commission has approved the proposed merger between
America Online Inc and Time Warner Inc after AOL offered to sever
all structural links with German media group Bertelsmann AG.
The proposed undertakings will prevent AOL from having access to
Europe's leading source of music publishing rights, thereby
eliminating the risk of dominance feared by the Commission in the
emerging markets for on-line delivery of music over the internet
and software-based music players.
Time Warner is one of the world's biggest media and
entertainment companies with interests in television networks, such
as CNN, magazines, including Time and People, and book publishing,
music, filmed entertainment and cable networks. AOL is the leading
internet access provider in the United States and the only provider
with a pan-European presence. In Europe, AOL operates mainly
through two joint ventures: AOL Europe, a 50/50 deal with
Bertelsmann, and AOL Compuserve France, a venture with both
Bertelsmann and Vivendi subsidiaries Cegetel and Canal Plus.
The merger will create the first internet vertically-integrated
content provider, distributing Time Warner branded content (music,
news, films, etc.) through AOL's internet distribution network.
Because of the structural links and some existing contractual
arrangements with Bertelsmann, AOL/TW would also have had preferred
access to Bertelsmann content and, in particular, to its large
music library. As a result AOL/Time Warner would have controlled
the leading source of music publishing rights in Europe, where Time
Warner and Bertelsmann together hold approximately one third of the
market.
Against this background, nothing would have prevented AOL from
dominating the emerging market for internet music delivery on-line,
which includes both digital downloads and streaming.
AOL/Time Warner would have become the gatekeeper to this nascent
market, dictating the conditions for the distribution of audio
files over the Internet. AOL/Time Warner could also have been
tempted to format Time Warner's and Bertelsmann's music in a way
compatible only with AOL's music player Winamp, but not with
competing music players. Winamp would have been able to play the
music of competing record companies, which generally use
non-proprietary formats. By contrast, competing players could not
read Time Warner and Bertelsmann audio files and consequently play
their music. Because of the technical limitations of the other
music players, AOL/Time Warner would have been able to impose
Winamp as the dominant player.
The Commission also considered concerns expressed with respect
to the European market for internet broadband access, but concluded
that those fears were unfounded since AOL/Time Warner have no
broadband infrastructure in Europe. Similarly, the Commission's
four-month probe also set to rest fears that the new entity could
have dominated the internet paid-for content market other than
music (films, TV programmes, etc.) as Time Warner video content
cannot be regarded as dominant in Europe.
In order to ease the competition concerns raised by the
transaction, the parties offered a package of commitments whose
ultimate goal is to break the links between Bertelsmann and AOL. In
particular, AOL and Bertelsmann have put in place a mechanism by
which Bertelsmann will progressively exit from AOL Europe and the
French joint venture AOL Compuserve.
In addition, the parties will take interim measures to ensure
that the relationships between AOL and Bertelsmann will be kept at
arm's length until Bertelsmann's exit has been completed. In
particular, AOL Time Warner will not take any action that would
result in Bertelsmann music being available on-line exclusively
through AOL or being formatted in a proprietary format that is
playable exclusively on an AOL music player.
With Europe's largest media company, particularly its leading
music unit BMG, freed to compete alone, the Commission concluded
that AOL/Time Warner would not have the critical mass in terms of
music publishing rights to dominate the market.
European Competition Commissioner Mario Monti said:
“The Commission has a duty to prevent
creation of dominant positions in all sectors, be they in the old
or new economy. In a music market already characterised by a high
degree of consolidation, the danger, which has been averted, was
that by allowing AOL to team up effectively with three of the five
music majors the resulting integrated company could have dominated
the on-line music distribution market and music players.”
The Bertelsmann undertaking also solved concerns in the UK
internet market, where AOL is one of the leading dial-up access
providers and where the bundling of Time Warner's and Bertelsmann's
music content with Internet subscriptions could have achieved
dominance in this market.
An Independent Compliance Monitor will be appointed to ensure
compliance with the undertakings concerning Bertelsmann until
Bertelsmann exits from AOL Europe and AOL Compuserve France.
The proposed deal between AOL and Time Warner has still to
satisfy US regulators, where the Federal Trade Commission is
concerned over the combined group’s links with telecoms giant
AT&T that may affect consumer access to broadband internet
services. A proposal for a merger between Warner Music, the music
arm of Time Warner, and EMI was recently withdrawn when it became
clear to the parties that the European Commission intended to block
the merger.
