From what I read before, Audible Magic works by examining data as it travels across the backbone (this takes place within the ISP), taking samples and then comparing it against a database, e.g. if the data is detected as MP3 data, it could compare an analysis of its acoustics against a database to check if it matches a given title.
Originally, Audible Magic was designed such that if it recognised data as a copyrighted work, it could terminate the connection. However, in this case it seems that it will only stop a connection if the data detected as one of Sony's tracks is flowing to a non subscriber of the network.
It is rather odd to see Sony setting up a ISP specifically to share its own music over, considering how strongly Sony has been against piracy over the past number of years. 
