The European Commission has approved the media mega merger of AOL and Time Warner. BBC News Online documents the Commission's statement:

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.

Vertically integrated content provider

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.

Broadband, access to music files

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.

Video content

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.

Interim measures

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.

Independent Compliance Monitor

"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", Mr Monti added.

"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."