Commission gives conditional approval to AOL & Time Warner merger

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.