‘New economy’ mega media marriage prompts age-old competition worries

Date: 19/10/00

By Tim Jones

MARIO Monti's treatment of the titanic merger between Internet giant America Online and media conglomerate Time Warner has been hailed as a ground-breaker.

To some, the European Commission anti-trust chief's willingness to address a new-fangled concentration of the entertainment supply chain - even if it means making up the EU's competition rulebook as he goes along - is a welcome sign of toughness. To others in the US senate, it is thinly-disguised protectionism.

But Monti and many long-serving officials in the directorate-general for competition would be the first to admit that while AOL/Time Warner has broken new ground, it built on a series of media cases solely involving EU-based companies and in many ways was just another trust.

Announcing his decision last week, Monti declared: "The Commission has a duty to prevent creation of dominant positions in all sectors, be they in the old or new economy."

But this deal stood out because of its sheer scale, not to mention the novelty of welding a traditional, albeit massive film-to-TV company with a glorified Internet access provider.

Time Warner's interests stretch from cable television networks CNN and TNT, and Time and People magazines to book publishing, music and film. AOL is the top Internet service provider in the US and, since it took over CompuServe, the only one with a pan-European presence. The company now has AOL Europe, a 50/50 deal with privately- owned German media group Bertelsmann, and AOL Compuserve France, a venture with Bertelsmann, Cegetel and Canal Plus (themselves subsidiaries of fast-expanding French utilities company Vivendi).

Yet, despite all the talk about new post-Web anti-trust paradigms and the theory of 'collective dominance', the competition department's fears of monopoly and its corresponding remedies were classic ones. Effectively, all AOL/Time Warner did to buy off Monti was cut its links with Bertelsmann and drop its side-deal with British commercial music producer EMI.

Assuming the US authorities give their approval - and that is by no means certain - the new company will be the first 'Internet vertically-integrated content provider', distributing Time Warner's music, news and films ('content', in cyberworld's quaint jargon) through AOL's Internet distribution network.

Fine. That is the future. The problem was what Bertelsmann would have brought to the party. The company owns the Bantam, Doubleday and Random House book brands and the BOL online book-retailer, as well as major stakes in broadcasters and stations CLT-UFA, RTL and Channel 5. Bertelsmann Music Group is a world leader, with Arista Records, RCA and the stable of BMG labels.

Combining this formidable media power with a dominant distribution channel scared the daylights out of Monti. His directorate-general was convinced that the new conglomerate would have favoured Bertelsmann 'content', especially its vast music library, because of the "structural links and some existing contractual arrangements".

AOL/Time Warner would have controlled the dominant source of music publishing rights in Europe. The temptation to format Warner and Bertelsmann music to be compatible only with AOL's music player, Winamp, would have been great. While Winamp could have played the music of rival companies using standard formats, there was a danger the latter could not have read Bertelsmann/Warner audio files.

"Nothing would have prevented AOL from dominating the emerging market for Internet music delivery on-line, which includes both digital downloads and streaming," said the Commission. The three companies could at a keystroke have become the "gatekeeper to this nascent market, dictating the conditions for the distribution of audio files over the Internet".

This may look like a new conundrum, but it is not. Monti's predecessor Karel van Miert had a run-in with Bertelsmann in 1995 over the creation of digital pay-TV venture Media Service Gesellschaft with Leo Kirch and Deutsche Telekom, which then held a legal monopoly over Germany's cable networks.

The deal was blocked, at least in part, because the three were effectively the only businesses capable of joining the market and because they would control the development of infrastructure, including cabling and the box-top decoders.

While US senators may complain about Monti's protectionism, they would do well to remember that the handful of media cases blocked in recent years - MSG, Holland Media Groep and Nordic Satellite Distribution - all involved European firms.

Article forms part of a survey 'EU and the media'.