The U.S. Department of Justice is growing suspicious of the labels'increasing power, and antitrust investigators are beginning to invitestart-ups to closed-door discussions in Washington, D.C., to determinewhether the labels are violating antitrust laws.
"We weren't surprised," said one Internet music executive who received aninvitation to a private meeting with the DOJ. "Whether or not this patternof behavior we've seen from record labels does or does not constitute antitrust, it's certainly (a concern) to us. I wasn't surprised it was (a concern) to others as well."
After years of tension betweenrecord labels and frustrated digital music companies, antitrust authoritiesjumped into the debate last week. The DOJ sent civil investigative demandsto several parties as part of a preliminary antitrust investigation--aprobe that could derail the recording industry's precarious foothold inonline music distribution.
The stakes could hardly be higher.
"Ultimately it will determine whether the online music industry is a $1billion or a $10 billion market," Jupiter Research's Aram Sinnreich said ofthe investigation.
Several state attorneys general are also closely watching the labels' online ventures for signs of anti-competitive behavior. They could eventually file their own lawsuit against the record labels--or a class-action suit on behalf of consumers.
"We're certainly aware of it and are monitoring the situation carefully," said Liz Leeds, Florida assistant attorney general. Florida is oneof 42 states pursuing an antitrust suit against the labels based on allegedprice fixing for CDs at retail outlets. Leeds said she'd gladly take thatbattle to online distributors if appropriate.
"We take on anything. We're not afraid of anybody," she said.
Concerns largely appear to hinge on MusicNet and Pressplay, joint venturesbetween the five major record labels to distribute music online.
MusicNet, owned by RealNetworks, AOL Time Warner, Bertelsmann and EMIGroup, is slated to start offering music through RealNetworks by the end ofNovember. Pressplay, a joint venture between Sony and Vivendi Universal, issupposed to appear on Yahoo, the Microsoft Network and MP3.com by the endof the year.
DOJ spokeswoman Gina Talamona declined to provide details about the
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A status quo shaken
The recording industry has never been popular--nor has it striven forpopular appeal. Instead of spending billions of dollars on advertising andmarketing, as consumer companies such as Coca-Cola and Ford Motor have,record labels have maintained a discreet distance from their actual products: Consumers buy "Radiohead" rather than "Capitol Records'Radiohead" albums.
Instead of grabbing market share and revenue through brand recognition,they control the industry through copyright laws. The laws give eachcompany a government-granted monopoly over its own artists' content. Fiveconglomerates--Sony, EMI Group, AOL Time Warner, Bertelsmann and VivendiUniversal--hold close to 85 percent of the United States music market. These companies have used their market dominance to wield deepinfluence over prices, technology decisions and the process of distributionto retail stores.
Their control slipped in the mid-1990s, when music fans started creatingMP3 files from ordinary CDs to post online. Control slipped further away in1999, when Napster and other file-swapping services hugely expanded theamount of free music that was available at the click of a mouse.
Even before Napster's rise, the record labels were besieged with requestsfrom start-up companies looking for rights to legally distribute musiconline. MP3.com, EMusic, Listen.com and a host of smaller start-upsbelieved they could revolutionize the music business.
Some, including Napster and MP3.com, launched services before getting theindustry's support. The labels took them to court, arguing that they wereviolating copyright law--and for the most part, the labels have won. Buteven those companies attempting to play strictly by the rules found it next to impossible to get licenses, convincing many entrepreneursthat the labels were colluding against them.
One former digital music executive, relating a conversation in mid-1999,says he was told flat out by a high-ranking label representative, "We meetwith all five of (the labels) once a week." The labels wouldn't "breakranks" on licensing music to start-ups, the music label executive reportedly said.
Record executives tell a different story--a classic case of the Old Economybutting heads with the New Economy.
Start-ups knew little about the music business and had no way to protectmusic against piracy, label executives complained. Most importantly, thestart-ups wanted to give away music and were unwilling to pay for it.
"We were in (the) business of trying to give licenses, but there was no one togive them to who would write a check," one record company executive said.
Last one standing is a monopolist?
As the start-ups folded, the record labels prepared to launch their ownstart-ups to feed consumers digital music. MusicNet and Pressplay differslightly, but each will be a subscription service offering downloaded andsome on-demand streamed music.
MusicNet will let its retailpartners--America Online, RealNetworks and perhaps Napster--decide howmuch they want to charge for subscriptions. Pressplay casts itself morestrictly as a retailer, imposing strict rules about what MSN, Yahooand others can charge consumers.
Many digital music executives are unwilling to criticize the labels'practices openly for fear of endangering ongoing negotiations. Butskepticism of the joint ventures abounds.
"When The Beatles sang, 'I Wanna Hold Your Hand,' I don't think they meantit as a business model for the record industry," said Bob Kohn, chief executive ofLaugh.com and former chairman of music download site EMusic, which wasrecently acquired by Vivendi Universal.
The labels insist that their joint ventures will not violate antitrust lawswhen they debut later this year.
"We are confident that, once it has gathered the relevant facts, theDepartment (of Justice) will conclude that our actions have been fullycompliant with all applicable laws," Recording Industry Association ofAmerica spokeswoman Amy Weiss said in a statement this week. "Indeed, the steps we have taken to facilitate the legitimate onlinemarketplace have been pro-competitive and beneficial to consumers."
One high-placed source close to one of the initiatives was frank in descriptions of the labels' calculations in forming the joint ventures. Themusic companies believed they had pushed right to the edge of collusion orantitrust concerns but had not crossed the line, the source said, decliningto be quoted directly.
Copyright experts say the joint ventures cannot be exclusive and pass DOJinspection. For instance, if a company wants music from AOL Time Warner, itmust be able to license it directly from Warner Music Group as well asMusicNet.
Appointment with "the janitor in chief"
In theory, the labels have said they will give music rights outside of thejoint ventures, recording industry critics say. But the number of broadlicenses approved for services competing against MusicNet or Pressplay canbe counted on one hand, they complain.
They also complain that the labels have dragged their feet for months oreven years when start-ups have asked about getting licenses.
"The janitor has to talk to you for a long time before he sets up a meetingwith the janitor in chief," one embittered Net executive said. "It's anextraordinarily protracted process."
Start-up executives also suspect collusion. They say contract terms offered areremarkably similar among the major labels: Almost all demand 7 cents persong for a download that is locked to a computer and expires after 30 days,for example.
"You maintain the polite fiction that you're sitting down with anindependent company that in no way colludes with its competitors," the Netexecutive said. "I suppose you could flip a coin 500 times and have it comeup the same way. And five independent companies could suggest the same contract terms."
The most tangible story comes from Napster, which is fighting a copyright lawsuit filed by the record companies. That company said MusicNetagreed to give it licenses to music but that the joint venture imposed acondition barring independent deals with Pressplay or other major labelsindividually.
"The major labels have employed a series of tactics to forestall orundermine competition in the digital music marketplace," said NapsterGeneral Counsel Jonathan Schwartz. "Their joint ventures are just the mostrecent."
It's unclear whether the start-ups are merely carping about their biggerrivals or whether they're uncovering violations of antitrust laws. Butthey're not the only ones suspicious about Pressplay, MusicNet andpotentially anticompetitive behavior among record labels.
"I'm really confused as to why the (record labels) came upon this way ofgetting together in a joint venture," federal Judge Marilyn Hall Patel saidlast week while discussing Napster's ongoing copyright lawsuit. "Even if itpasses antitrust analysis, it looks bad, sounds bad, smells bad."