Avoiding an unnecessary Phase 2 merger investigation

The UK's competition authority (CMA) unusually cleared a merger (Sony Music / AWAL) after nine months of investigation. Could a Phase 2 investigation have been avoided?

On 16 March 2022 the Competition and Markets Authority (CMA) issued its final report into the completed acquisition by Sony Music Entertainment (Sony Music) of AWAL and Kobalt Neighbouring rights businesses from Kobalt Music Group Limited. What is very unusual is that the CMA cleared the acquisition after its Phase 1 inquiry and then Phase 2 investigation, together lasting just under nine months.1

This raises the question, what changed the CMA’s view given that after just over two months of its Phase 1 inquiry, the CMA decided that the merger may be expected to result in a substantial lessening of competition and referred the merger for a Phase 2 investigation?2

How confident should the CMA be in the view that it holds (what is the standard of proof)? The CMA’s opinion is that at the end of Phase 1 the CMA should hold the view that there is a ‘realistic prospect’ that the merger may be expected to result in a substantial lessening of competition, while at the end of its Phase 2 investigation the CMA should decide based on a ‘balance of probabilities’.3

Following is a summary of the provisional findings of the CMA at the end of its Phase 1 inquiry. Sony Music is engaged in the distribution of physical and digital recorded music (recorded music) and the management and licensing of the words and music of songs (music publishing). In developing its business Sony Music is engaged in various activities in the finding and development of new artists, through its major labels, specialist labels or niche business units. One such business is The Orchard which develops nascent artists, often who are signed with third-party record labels. AWAL’s activities are like The Orchard, although focused on artists signed with Kobalt. KNR collects neighbouring rights royalties from the public use of music recordings on behalf of artists. The overlaps between Sony Music and the target businesses are in digital music distribution and related artist and repertoire (A&R) services, including artist and label (A&L) services.

The Phase 1 and Phase 2 conclusions

The Phase 1 decision identified that:

  1. The UK digital music distribution market is highly concentrated in the hands of the major recorded music companies.
  2. AWAL was an important emerging supplier of A&L services and while there were uncertainties, AWAL’s intention was to become a stronger competitor.
  3. Absent the merger Sony Music had an intention to expand The Orchard business, so placing more focus on the mid-tier artist segment, competing more directly with AWAL.
  4. Given the above the merger will lead to the removal of one of Sony Music’s competitors.
  5. The CMA did not believe the remaining suppliers would be sufficient to effectively constrain the Parties post-merger.
  6. Accordingly, the CMA believed that the merger raises significant competition concerns because of a loss of potential competition in relation to digital music distribution in the UK.

In contrast, the Phase 2 Decision, identified that:

  1. Both The Orchard and AWAL provide A&L services, but do not compete closely, given The Orchard focuses on label services while AWAL focuses on artist services.
  2. AWAL would not in the foreseeable future (two to three years) have expanded its label business and so would not likely become a closer competitor to The Orchard.
  3. AWAL’s rate of growth can reasonably be expected to grow but at a slower rate.
  4. Sony Music would likely have expanded The Orchard, making it a closer competitor to AWAL.
  5. However, there are a number of constraints on both parties’ A&L services, notably third-party constraints which collectively would mean the loss in constraint from AWAL merging with Sony Music would not be significant, as rivals continue to discipline the commercial behaviour of the parties post-merger.

The CMA’s change of view is due to the subject of future competition. A merger involving a potential competitor might lessen future competition between the merging parties after the potential entrant would have entered or expanded. This is a loss of potential competitive pressure. Additionally, the potential of market entry influences existing competition in the markets (referred to as the dynamic competitive process). A merger might lead to a loss of dynamic competition. More emphasis has been placed on consideration of potential and dynamic competition by the CMA and other competition authorities, such as the European Commission. Indeed, the CMA’s latest version of its Merger Assessment Guidelines has a new section devoted to dynamic competition.4 The CMA’s assessment of dynamic competition was a key aspect of its decision to require Facebook to divest GIPHY in November 2021, just one month after its Phase 1 decision regarding Sony Music.5

So, what caused the CMA to change its view? The CMA obtained information and opinion from three sources: the parties, customers of the parties and competitors. It is not evident that any one source proved more influential on the CMA. Given the parties cannot control what customers or competitors will communicate to the CMA, it is their own information which could be critical. Of this information, documentation held by the parties, in particular Sony, that addressed the business of The Orchard and its market situation did not identify AWAL as a leading competitor in some instances. It seems this was persuasive, given it was largely supported by the other sources.

A conclusion from reading the final report of the CMA is that parties should be particularly sensitive to the subject of potential and dynamic competition. The goal is to overcome the CMA’s cautious approach during the Phase 1 inquiry, providing it with the confidence that there is no substantial competition concern regarding potential competition. This goal might be achieved by providing a comprehensive set of (historic and current) internally created documents to support the parties’ argument that a transaction does not raise a potential competition concern. Collecting as much of this documentation as possible and presenting it to the CMA during Phase 1 would be the appropriate course of action, despite the effort inevitably involved, to help avoid the material time involved and significant resources required for a Phase 2 investigation. This course of action is particularly recommended for acquisitions in the technology sector and concerning digital markets.


1 The CMA announced the launch of its merger inquiry on 1 July 2021.

2 Decision issued 11 October 2021, accessible at Phase 1 Decision.

3 CMA, Merger Assessment Guidelines, 18 March 2021, CMA 129, section 2.31. accessible at Merger Assessment Guidelines.

4 CMA, Merger Assessment Guidelines, 18 March 2021, CMA129, section 5, accessible at Merger Assessment Guidelines.

5 CMA, Completed acquisition by Facebook, Inc. (now Meta Platforms, Inc) of Giphy, Inc., Final report, 30 November 2021, accessible at CMA Facebook / GIPHY  decision. See also Kiran Desai, Facebook / GIPHY merger – The End of Big Tech’s Spending Spree?, European Competition and Regulatory Review, Volume 6 (2022), Issue 1.


This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2024.


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