[Random-bits] EU release on AOL/Time Warner Merger

[James Love]

http://europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=IP/00/1145|0|RAPID&lg=EN

Commission gives conditional approval to AOL/Time Warner merger
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DN: IP/00/1145     Date: 2000-10-11

Ip/00/1145

Brussels, 11 October 2000


Commission gives conditional approval to AOL/Time Warner merger

The European Commission has approved the proposed merger between America
Online Inc (AOL) 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 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 (e.g. CNN and TNT), magazines (e.g.
Time, 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 TW 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/TW would have
controlled the leading source of music publishing rights in Europe, where
TW 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/TW would have become the
gatekeeper to this nascent market, dictating the conditions for the
distribution of audio files over the Internet. AOL/TW could also have been
tempted to format TW'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 TW and Bertelsmann audio files and
consequently play their music. Because of the technical limitations of the
other music players, AOL/TW would have been able to impose Winamp as the
dominant player.

According to third parties the deal also raised concerns with respect to
the European market for Internet broadband access, but the Commission
concluded that those fears were unfounded since AOL/TW 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
online 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/TW would not
have the critical mass in terms of music publishing rights to dominate the
market.

« 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 », European Competition
Commissioner Mario Monti said.

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 TW'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.