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28 States Sue Major Labels and Retailers Over Alleged Price Fixing Conspiracy
By Michele Wilson-Morris
(more articles from this author)
2000-08-08
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The music industry was rocked today by a lawsuit that was filed against major record labels and several national music retailers for CD price fixing. With the RIAA, the watchdog of the recording industry, hammering Napster and Scour.com for what it calls "egregious violations" of protected copyrights, it appears that they might have been better served by watching their own camp to see whose hand was in what cookie jar. Based on the lawsuit that was filed today by 28 States, the major labels have committed some egregious violations of their own. Today, the cookies are flying and the normally vocal RIAA is responding with a "no comment." The major labels targeted by the lawsuit are: BMG, EMI Group, Warner Brothers, Sony Music Entertainment, and Universal Music Group. National retailers MusicLand Stores, Tower Records, and Trans World Entertainment Corp. were also named as defendants.

The lawsuit was filed on behalf of consumers of the 28 states to retrieve "damages resulting from illegal price-fixing agreements between each of the defendant labels and distributors of prerecorded music (including compact discs, cassettes and albums) and certain traditional retailers." The suit also alleges "the purpose of the illegal agreements was to raise prices and reduce retail price competition which threatened the high and stable profit margins for CDs enjoyed by both the defendant labels and distributors and many music retailers."

In May, the major labels settled with the FTC over allegations of CD price fixing. The FTC made the allegations after an industry wide review of the end-to-end CD pricing process. The FTC determined that as a result of the actions taken by these companies, distributors and retailers were able to increase pricing to such a large extent that consumers may have paid over $480 million more for CDs than they should have over the last three years.

Apparently, in the early 1990s, high volume discount CD stores such as Circuit City, Best Buy, and Target, began pricing CDs as low as $9.99, which was $2-3 lower than what retailers were charging at the time. A price war ensued between these companies and other retailers that apparently caught the attention of the major labels. Not wanting to lose money in a price war, the labels began using their existing "cooperative advertising" programs as a weapon to force retailers to bring prices back up. Cooperative advertising programs are one of the ways in which retailers make money. Through cooperative advertising, record labels pay retailers to advertise certain CDs, place specific CDs near checkout locations, and play them through PA systems located in the store to entice potential buyers. The problem arose when the record labels went so far as to require retailers to use a certain "Minimum Advertised Price" or MAP or risk the possible loss of cooperative advertising dollars. Naturally, this advertised price was much higher than the prices that were being paid during the price war. Retailers couldn't afford to lose the money provided to them through those programs, and they began raising CD prices until they got to the point where they are today - extremely high.

According to a statement released by the FTC Chairman and Commissioners, the record labels violated the antitrust act in two respects. Per the FTC, "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. When viewed individually, each distributor's arrangement constitutes an unreasonable vertical restraint of trade under the rule of reason."

The FTC also released the following statements: "The Minimum Advertised Pricing ("MAP") policies of the five distributors in this matter go well beyond the cooperative advertising programs with which the Commission has previously dealt: the distributors' MAP policies prohibited retailers from advertising discounts in all advertising, including advertising paid for entirely by the retailer; the MAP policies applied to in-store advertising, excepting only the smallest price labels affixed to the product; and a single violation of a distributor's MAP policy carried severe financial penalties, resulting in the loss of all MAP funds for all of the retailer's stores for 60 to 90 days."

"Retailers were free to sell at any price, so long as they did not advertise a discounted price. In fact, there was evidence that some retailers on rare occasions did sell product at a discount without advertising the discounted price, instead advertising simply that the product was available at a "guaranteed low price." We are therefore reluctant to declare that compliance with the MAP policies by retailers constituted per se unlawful minimum resale price maintenance, because we cannot say that there is sufficient evidence of an agreement by retailers to charge a minimum price."

Online music piracy has received significant attention with the ready availability of major artists recordings in the MP3 format and popularity of Napster. Since retail pricing is very tied to the existence and scale of piracy in any market, MusicDish's sister publication Mi2N conducted a survey on retail pricing of music CDs in May 2000. The majority of participants indicated that today's pricing levels were not only unreasonable (74%), but excessive as compared to other forms of entertainment (70%). To reinforce the point, 40% stated that they would significantly increase their CD purchasing if prices were to drop to $9.99, while 45% indicated that they would marginally increase their purchasing. But an even greater measure of consumer frustration with CD prices is the fact that when some major labels announced that they would probably price digital downloads at levels comparable to CDs, 96% of respondents indicated that they would be unwilling to buy digital downloads of major recording artists' work at those levels.

The states of New York and Florida are leading the lawsuit. Other states involved are Arizona, Arkansas, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Mississippi, Missouri, Nevada, New Mexico, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Texas, Utah, Vermont, Washington, West Virginia and Wisconsin. Puerto Rico and the Northern Mariana Islands were also listed as plaintiffs.

Okay majors, retailers, and the RIAA - don't be angry. Just know that MusicDish has an equal opportunity hotseat. And remember - the next time you're in the mood for cookies, eat your own and not those of music lovers and consumers.

Linkography

Best Buy - www.bestbuy.com
BMG - www.bmg.com
Circuit City - www.circuitcity.com
EMI - www.emigroup.com
FTC - www.ftc.gov
MusicLand Stores - www.musicland.com
Napster - www.napster.com
RIAA - www.riaa.com
Scour.com - www.scour.com
Sony - www.sony.com
Target - www.target.com
Time Warner - www.timewarner.com
Tower Records - www.towerrecords.com
Trans World Entertainment Corp. - www.twec.com
Universal - www.umusic.com

Related MusicDish e-Journal Articles:
» Film and Music Industries Think Scour is Sour (2000-08-02)
» Scratch The Surface And What Do You Find: A Cheaper CD - Follow-up on the FTC Settlement with the Major Labels (2000-05-18)
» Five Major Labels Settle With The FTC Over Retailer CD Pricing - In The Last 3 Years, Consumers May Have Paid $480 Million More For CDs (2000-05-11)
» Music Retailers/NARM Sue Sony Music (2000-02-15)
» Federal Trade Commission Launches Investigation Into Possible Trade Violations Involving CD Price Fixing (2000-01-06)

Related News from Mi2N:
» Statement Of FTC Chairman And Commissioners On CD Pricing Settlement
» Record Companies Settle FTC Charges Of Restraining Competition In CD Music Market


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