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

By Michele Wilson-Morris (more articles from this author) 2000-05-11

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In a groundbreaking announcement yesterday [May 10, 2000], the Federal Trade Commission (FTC) stated that separate settlement agreements have been reached with the five record companies who have a combined 85% market share of CD sales. The FTC charged Universal Music and Video Distribution, Time Warner, BMG, EMI, and Sony Corporation of America with illegally modifying their advertising models to encourage retailers to charge consumers higher prices for CDs.

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. The agreements reached by the FTC and the record labels should increase competition in the retail music market, and should affect CD prices significantly.

Specifically, the labels were charged with requiring retailers to advertise CD prices at or in excess of the amount established by distributors. It is alleged that significant cooperative advertising payments were made in exchange for the increased CD prices, and that advertisements through all mediums were affected, including advertising that was solely funded by the retailer.

It is believed that the record labels took these measures to extinguish a price war between more traditional CD retailers and discount CD retailers who began operating in the early 1990's and gained market share by offering CDs at prices well below those of their competitors. As traditional retailers began to increase prices as a result of pressure from the record labels, distributors and even wholesalers began increasing prices, which eventually led to the sticker shock that one gets when purchasing CDs today.

The settlements would prevent the record labels from connecting monies from any promotional advertising to advertised retail prices for seven years. Record labels would then be prohibited for the next 13 years from placing similar stipulations on promotional funds for advertisements that they do not fund. Additionally, relationships with retailers may not be severed based on their advertised CD prices.

The commission issued the following statement: "The Commission has found reason to believe that the arrangements entered into by the five largest distributors of prerecorded music violate the antitrust laws in two aspects. First, when considered together, the arrangements constitute practices that facilitate horizontal collusion among the distributors, in violation of Section 5 of the Federal Trade 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."

Details regarding the proposed agreements will be published in an upcoming issue of the Federal Register. The FTC will make a final ruling based on public comments that are received for 30 days after the publication.

Linkography

FTC - www.ftc.gov
Universal - www.umusic.com
Time Warner - www.timewarner.com
BMG - www.bmg.com
EMI - www.emigroup.com
Sony - www.sony.com

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