The European Commission, which has been examining the $1.9bn deal since February, had given Universal until July 3 to reply to concerns set out in a 194-page statement of objections sent last month.
Vivendi-owned Universal’s stars include Lady Gaga, Rihanna and U2 while EMI’s recorded music catalogues include The Beatles and Katy Perry. The combined company would be almost twice the size of its nearest rival in Europe.
The EU watchdog expressed strong concerns about the deal, saying it was incompatible with the EU’s internal market and would completely change the interaction between supply and demand in the music industry, said one of the sources.
The commission also rejected Universal’s arguments that the threat from piracy and the bargaining clout exerted by customers such as Apple’s iTunes, Amazon and other online music services would limit its power, the source said.
The document suggested that “Universal will have to significantly reduce its market share”, the source added.
The company could offer to sell catalogues or offer improved licensing deals to rivals to reassure regula- tors.
Universal and EMI hold a combined market share just below 40 per cent of digital music distributed by iTunes and Spotify in Europe, making it the biggest single source.
Critics say the merged company could control the future of digital media by withholding content from distributors.
Universal declined to comment on the details but said it was preparing a response to the commission’s statement “which will address the concerns outlined in this procedural document”.