Music rivals push EU to stop AOL-Time Warner

"AOL will have access to enormous catalogs for both music and copyrights," said Patrick Zelnik, chief executive of Naive Records and president of the French record producers' union. "It's necessary that they treat other music houses in the same way that they treat their own--not only in terms of access to their portals but also offering us the same prices to use AOL."

AOL largely restated prior pledges in a formal submission last week to the European Commission, according to people who saw the proposals. German media company Bertelsmann would withdraw from AOL Europe, and a combined AOL-Time Warner would make its music compatible with rivals' software music-player technologies, the sources said, excluding other technologies that allow the transmission of movies or sports over the Web.

The submission and the rivals' responses, due today, are likely to spark negotiations that could last until Oct. 24 when the commission, the EU's executive arm, has to deliver a final ruling on the giant merger.

EU regulators worry that the union of the Internet service provider and the media titan would dominate the market for the online sale of music, squeezing out hundreds of independent labels. In the United States, the issues focus on opening Time Warner's cable TV lines to companies that compete with AOL in offering high-speed online access.

"If they don't make any worthwhile concessions, there's a good chance the EU could block the deal," said Eric Burkel, a technology and media analyst with Global Equities in Paris. "They're playing liar's poker. This is a situation of brinkmanship where America Online tries to see how far it can go."

Accepting restrictions
After guaranteeing that Bertelsmann would exit AOL's European venture and pledging not to discriminate against non-AOL Internet companies in online music distribution, AOL also agreed to make music available on three separate encryption and compression technologies and three music-player software systems for five years.

The company also said that for three years it won't require customers who sign up for U.S. carriage also to agree to AOL Europe carriage, people familiar with the proposals said.

The concessions don't address some issues important to rivals, the people said. AOL's promise not to discriminate in the sale of music over the Internet fails to cover videos, games or other online content. The pledge also only pertains to music it owns being sold on other companies' Web sites and not to music owned by rival companies being offered on AOL systems.

The next step in proceedings is a meeting Wednesday of a committee of antitrust experts from the 15 EU governments to advise competition commissioner Mario Monti.

The commission declined to disclose the latest concessions. "Obviously, they submitted something new. What is the point in submitting the same thing?" Amelia Torres, Monti's spokeswoman, said Friday.

AOL spokeswoman Tricia Primrose declined to comment. Time Warner spokesman Scott Miller, who also declined to discuss the proposals, said, "we're continuing our constructive discussions with the commission and are on track to close in the fall."

Taking stock
Since agreeing to buy Time Warner in January, AOL's shares have lost more than a quarter of their value, partly on concern that regulators might block or impose restrictions on the merger. The value of the acquisition has dropped from $178 billion the day it was announced, Jan. 10.

With AOL's more than 20 million Internet subscribers and Time Warner's TV programs, music, movies and publications, the two could drive smaller competitors out of business by dictating prices for online music distribution and with their marketing clout, competitors say. The combined entity's size in the United States could also help subsidize expansion in Europe, they say.

Rivals including the Independent Music Companies Association, which represents European record labels and industry groups, warn that Time Warner could also distribute its content on rival sites such as Vivendi's Vizzavi. They also worry that AOL-Time Warner will be able to offer music for free on their Web sites and attract more visitors.

"The legal protection of the authors will be weakened because when a record company and publisher own the online or distribution part as well, their interest will be to get as many online customers as possible," said Peter Schoenning, an associate at Nyborg & Roerdam in Copenhagen, a law firm that represents the Danish Society for Jazz, Rock and Folk Composers.

Some competitors favor establishing a fast-track arbitration procedure in which an independent panel is given one month to rule on complaints alleging a company is discriminating against rivals. Such a system was set up as a condition for Vodafone Group's purchase earlier this year of Mannesmann--the second-biggest acquisition ever--which expanded a company that already was the world's top mobile-phone operator.

Time Warner-EMI offered to sell labels in France, Denmark, Greece and Spain as well as divesting the United Kingdom's Virgin Songs and Magnet publishing catalog, according to people who have seen the companies' submission to the EU.

The proposals came on top of previous pledges not to discriminate against rivals in online music distribution for five years and promises to make their music compatible with at least three encryption technologies and at least three software music-player technologies not owned by AOL or Time Warner.

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