Online Policy Group

BRUSSELS, Oct 11 (Reuters) - Internet giant America Online Inc won European approval on Wednesday for its $129 billion takeover of Time Warner Inc, after agreeing to sever all links with Germany's Bertelsmann AG.

The European Commission said the companies' concessions plus last week's withdrawal of the planned music joint venture of Warner Music and EMI Group Plc had reassured it the new group would not be able to dominate the emerging market for online music.

Bertelsmann is owner of BMG music, one of the world's five "major" record labels, along with EMI, Warner Music, Seagram's Universal Music and Sony Music.

Because of its links with Bertelsmann, AOL Time Warner would have had preferred access to Bertelsmann's music library, giving it control over the leading source of music publishing rights in Europe, the Commission said.

"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," EU Competition Commissioner Mario Monti said in a statement.

Under the agreement, Bertelsmann will progressively withdraw from the AOL Europe joint venture and will also pull out of the French joint venture AOL Compuserve, in which Vivendi subsidiaries Cegetel and Canal Plus are also involved.

The Commission is due to rule on the rival merger of Vivendi with Canada's Seagram on Friday, and is expected to take a close look at the remaining link between Vivendi and AOL in France.

EARLIER OFFER NOT ENOUGH

Monti's spokeswoman Amelia Torres said AOL and Time Warner had offered to resolve the problems caused by their link to Bertelsmann during the Commission's initial one-month probe of the deal.

But she said guarantees given at the time were insufficient to satisfy the Commission, particularly given the obvious links with the planned EMI/Warner Music venture.

That deal was abandoned last Thursday and this, plus the end of the link with Bertelsmann, addressed the Commission's remaining competition concerns.

"With Europe's largest media company (Bertelsmann), particularly its leading music unit BMG, free 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," the Commission said.

For its part Bertelsmann declined to comment on the European Commission's decision, saying it was not involved in the case.

Bertelsmann said in March it would sell its 50 percent stake in its AOL Europe joint venture and divest its holding in the French joint venture AOL Compuserve.

Bertelsmann's forced withdrawal from the venture in the wake of the AOL/Time Warner deal has focused attention on potential acquisition targets in Europe and the U.S.

The cash-rich group, which has some 30 billion marks ($13.38 billion) to spend, has made no secret of its ambitions to expand in both e-commerce and providing online content.

Press reports earlier this month suggested that Bertelsmann was assessing the possibilities of its BMG music business combining with EMI, after EMI and Warner Music withdrew their own merger plan to create the world's largest music business in the face of EC regulatory objections.

AOL/TIME WARNER CONFIDENT OF US APPROVAL

Meanwhile AOL and Time Warner said in a statement they were confident the U.S. authorities would follow the Commission's lead in clearing what is the biggest ever U.S. merger so that the deal could be closed this autumn.

The deal is still awaiting Federal Trade Commission (FTC) and Federal Communications Commission approval. Both agencies are expected to make a ruling in the coming weeks.

One of the FTC's key concerns is that the combined company would dominate high-speed cable lines in cities where number two U.S. cable provider Time Warner operates cable TV systems.

The FTC wants the companies to let rivals have access to Time Warner's cable pipeline and the agency may make its approval conditional on open access. The FCC must also determine whether the transfer of Time Warner's broadcast licences is in the public interest.

EC Commissioner Monti's investigation concluded that rival companies' fears that the new group would dominate the European broadband access market were unfounded.

The Commission also dismissed fears that new entity could dominate the market for Internet paid-for content other than music, concluding that Time Warner's video content was not dominant on this side of the Atlantic.

An independent monitor will be appointed to ensure the relationship between AOL and Bertelsmann is kept at arm's length until the link is broken and in particular to ensure that Bertelsmann's music is not available online exclusively through AOL or formatted in a proprietary format that is playable exclusively on AOL's Winamp music player.

The Commission said the concessions also solved concerns in the British Internet market where the combination of Time Warner and Bertelsmann's music content with AOL's Internet subscriptions could have led to market dominance.

By 1518 GMT AOL shares were trading down $3.99 at $53.25 on Wednesday, while Time Warner was down $6.13 at $78.97.

((Brussels newsroom, +322 287 6830, fax +322 230 5573, brussels.newsroom@reuters.com))