Antitrust Settlement with Record Distributors and Retailers

This case is fascinating: from the original FTC investigation, the workings of MAP (minimum advertised price), the 42-state law suit on behalf of millions of consumers, to the settlement in the form of cash and a whole bunch of CDs – the distribution system of which will be a byzantine endeavor.

It has also been determined that if the value of the average claim drops below $5, then the entire settlement will be distributed in via the “cypres doctrine” – ie the cash would also be “given away,” probably to libraries and schools, which would provide maximum public good.

Many questions emerge: what about royalties to songwriters and artists? A spokesperson for the NY Attorney General’s office said that the giveaways would fall under the “free goods” provision of artists’ contracts and there would be no royalties. I have spoken with a representative of songwriters and publishers, who said “we are due payment for any CD that has been “permanently parted with” paid for or not. No ‘free goods’ reductions exist in mechanical licenses. By my calculations they owe us $5,600,000. (7 million CD X 10 cuts per CD X 8¢ a track.).” Surely there is a confrontation/law suit lurking here, especially in light of the ongoing Cal Senate hearings on label accounting practices.

The labels are now getting it from both directions: artists (the Senate hearings, challenges from the Dixie Chicks, Courtney Love and consumers. In conjunction with the P2P mess (for them), this is creating a massive squeeze that should greatly precipitate a reordering of the industry structure/business model. They will simply be forced to change.

Some details: a Trans World executive told me that they were paying a small percentage of the settlement as a reflection of their relative guilt. A Florida attorney on the case told me Trans World’s relatively small assessment was based upon their relatively small market share – not relative guilt – and also on their poor financial situation, i.e. nothing to do with relative guilt. So spin is a big issue here as well.

This story is a synecdoche for the state of the industry as a whole: violations of trust, accusations, arrogance, then settlement in the face of overwhelming evidence, leading to real change.

This an absorbing tale of corporate intrigue, governmental response, and an industry about to be pushed over the edge. This story could even be the edge. (introduction added 10/1)

Press release from the Tennessee Attorney General’s office:

TENNESSEE ATTORNEY GENERAL WINS ANTITRUST SETTLEMENT IN LAWSUIT ALLEGING PRICING CONSPIRACY ON MUSIC CDS

Tennessee Attorney General Paul G. Summers announced today that five of the largest U.S. distributors of pre-recorded music CDs and three large retailers agreed to pay millions of dollars in cash and free CDs as part of an agreement on price-fixing allegations.

The companies will pay $67,375,000 in cash, provide $75,500,000 worth of music CDs, and not engage in sales practices that allegedly led to artificially high retail prices for music CDs and reduced retail competition as part of the agreement. Tennessee’s share is an estimated $993,948 in cash and $1,507,852 in CDs.

“The lawsuit and settlement demonstrate our commitment to halting corporate misconduct,” Attorney General Summers said. “Such illegal activity causes our citizens to pay higher prices and distorts our free market economy.”

Tennessee, along with 41 other states and three territories filed an antitrust lawsuit in federal court in August, 2000. The lawsuit alleged the five music distributors (including their affiliated labels) and three large music retailers entered into illegal conspiracies to raise the price of pre-recorded music to consumers. The defendants in the lawsuit are music distributors Bertelsmann Music Group, Inc., EMI Music Distribution, Warner-Elektra-Atlantic Corporation, Sony Music Entertainment, Inc., Universal Music Group and national retail chains Transworld Entertainment Corporation, Tower Records, and Musicland Stores Corporation. The defendants deny these allegations.

Today’s agreement calls for the defendants to change sales practices to ensure strong price competition among retailers. The companies will pay $67,375,000 in consumer compensation, charitable purposes, or some combination of both. Notice of how to file a claim will be provided to the public at a later date. Finally, the defendants will provide approximately 7,000,000 music CDs (valued at $75,500,000) for distribution by the state attorneys general to not-for-profit corporations, charitable groups and governmental entities such as schools and libraries for the benefit of all consumers in each state.

UPDATE
The antitrust lawsuit filed by the 42 states was based upon information generated by an FTC investigation settled with the distributors in 2000 as stated here:

The Federal Trade Commission announced today that it has reached separate settlement agreements with Universal Music and Video Distribution, Sony Corp. of America, Time-Warner Inc., EMI Music Distribution and Bertelsmann Music Group (BMG), the five largest distributors of recorded music who sell approximately 85 percent of all compact discs (CDs) purchased in the United States to end their allegedly illegal advertising policies that affected prices for CDs. The proposed agreements would settle FTC charges that all five companies illegally modified their existing cooperative advertising programs to induce retailers into charging consumers higher prices for CDs, allowing the distributors to raise their own prices. The complaints are the culmination of an extensive industry-wide investigation by the FTC of these practices. The FTC’s orders would require all the companies to discontinue their “Minimum Advertised Price” (MAP) programs in their entirety for seven years. The orders contain additional provisions to preclude the companies from maintaining the anticompetitive status quo.

“The FTC estimates that U.S. consumers may have paid as much as $480 million more than they should have for CDs and other music because of these policies over the last three years. These settlements will eliminate these policies and should help restore much-needed competition to the retail music market, consisting of $15 billion in annual sales. Today’s news should be sweet music to the ears of all CD purchasers,” said Chairman Robert Pitofsky.

According to the FTC’s complaints, the companies required retailers to advertise CDs at or above the MAP set by the distribution company in exchange for substantial cooperative advertising payments. The restrictions applied to all advertising, including television, radio, newspaper and signs and banners within the retailers’ own stores. The restrictions even applied to advertising funded entirely by the retailer. Under the policies, large music retailers would lose millions of dollars a year if they failed to follow the MAP restrictions.

The complaints detail how MAP policies were adopted to squelch discount music retailing. In the early 1990s, many new music retailers, including major consumer electronics stores, started to sell CDs at low prices to gain customers and market share. The more traditional music retailers also lowered their prices to compete. This retail “price war” led to lower CD prices for U.S. consumers as prices for popular CDs fell as low as $9.99. The record companies adopted the MAP policies in 1995-96 to extinguish this “price war,” the Commission contends.

The FTC alleges these MAP policies achieved their unlawful objective. The “price war” ended shortly after the policies were adopted and the retail price of CDs increased. The distributors then increased their own prices, and since 1997, wholesale prices for music have increased.

The FTC’s complaints state that the MAP policies imposed by each distributor violated Section 5 of the FTC Act, as unreasonable restraints of trade under the so-called “Rule of Reason,” and that the MAP policies together were unlawful “facilitating practices” which increase the risk of collusion or interdependent conduct by the market participants.

The proposed settlements would prohibit all five companies from linking any promotional funds to the advertised prices of their retailer customers for the next seven years. For the next 13 years after that, the companies would be prohibited from conditioning promotional money on the prices contained in advertisements they do not pay for. The agreements also would prohibit the companies from terminating relationships with any retailer based on that retailer’s prices.

The Commission vote to accept the proposed consent agreements was 5-0. The five Commissioners issued a statement in which they said: “The Commission has unanimously found reason to believe that the arrangements entered into by the five largest distributors of prerecorded music violate the antitrust laws in two respects. First, when considered together, the arrangements constitute practices that facilitate horizontal collusion among the distributors, in violation of Section 5 of the Federal Trade Commission Act. Second, when viewed individually, each distributor’s arrangement constitutes an unreasonable vertical restraint of trade under the rule of reason.

“In the future, the Commission will view with great skepticism cooperative advertising programs that effectively eliminate the ability of dealers to sell product at a discount. The Commission will, of course, consider per se unlawful(1) any arrangement between a manufacturer and its dealers that includes an explicit or implied agreement on minimum price or price levels, and it will henceforth consider unlawful arrangements that have the same practical effect of such an agreement without a detailed market analysis, even if adopted by a manufacturer that lacks substantial market power.”

An announcement regarding the proposed consent agreements will be published in the Federal Register shortly. These agreements will be subject to public comment for 30 days, until June 9, after which the Commission will decide whether to make them final. Comments should be addressed to the FTC, Office of the Secretary, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

The Commissioners statement referenced above states:

Statement of Chairman Robert Pitofsky and Commissioners Sheila F. Anthony, Mozelle W. Thompson, Orson Swindle, and Thomas B. Leary

In the Matter of Time Warner Inc.;
In the Matter of Sony Music Entertainment Inc.;
In the Matter of Capitol Records, Inc., d.b.a. “EMI Music Distribution”;
In the Matter of Universal Music & Video Distribution Corp.
and UMG Recordings, Inc.; and
In the Matter of BMG Music, d.b.a. “BMG Entertainment”

File No. 971-0070