Tue, Oct 23, 2001 page19

• US government probes tactics of record labels

  After initially nodding off, record labels eventually aggressively and discordantly moved on to the Internet -- whichhas sparked an antitrust investigation

  • By Matt Richtel / NY TIMES NEWS SERVICE
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  For several years, some consumers and financial analysts have accused the major record labels of moving too slowly on to the Internet. Now, the government and the companies' competitors are saying the labels may have moved online too aggressively.

  Those accusations are behind an antitrust investigation, which the Justice Department disclosed last week. In essence, the government is exploring whether the recording industry is illegally trying to dominate distribution of music on the Internet.

  Through two separate partnerships, the five major recording companies plan to roll out online music services that will sell access to their large catalogs over the Internet. One is Pressplay, a joint venture of the Sony Music Group and Vivendi Universal. The other is MusicNet, backed by Bertelsmann, EMI Records and AOL-Time Warner, the parent of Warner Music. The ventures, which previously assured consumers that they would start operating by the end of lat summer, plan to begin by the end of the year.

  Access limited

  Other online music distributors complain that the big music companies have been reluctant to give them access to their music. They say it is as if the big labels were opening stores and not letting any other store sell their music.

  The Justice Department, in a rare confirmation of an inquiry in progress, said last week that it was investigating whether the industry was involved in anticompetitive practices. The department would not comment further, but people close to the inquiry and those who have received subpoenas said investigators were focusing on the labels' establishment of the two joint ventures and their reluctance so far to license their catalogs to competing Internet distributors.

  Separately, the European Commission said last week that it was in the early stages of an inquiry into the recording industry's behavior.

  At stake is the revenue stream now shared by recording companies, songwriters and publishers and conventional retailers. Largely through the copyrights they hold, the five big labels control 85 percent of the music distributed domestically in the physical world. The Internet, by permitting sale of music without the need for manufacturing CDs or shipping disks or tapes to retail stores, could transform the industry's economics.

  "It is anti-competitive of the labels to use the leverage of their copyright ownership to prevent others from distribution as well," said Aram Sinnreich, a media analyst with Jupiter Research.

  Recording industry officials say the very existence of two joint ventures, designed to compete against each other, indicates that the labels are not colluding -- particularly because the two ventures have fundamentally different business models.

  MusicNet terms itself a wholesaler, through which other online music services will be able to set their own prices and subscription models -- like how much content users can download over what period. Pressplay is a consumer brand unto itself, dictating to its licensees -- Yahoo and MSN have already announced deals -- the price and subscription terms, which have not yet been announced.

  Critics particularly chafe at the Pressplay model. But they also say that the major labels behind MusicNet, by the prices they set for their own offerings, will effectively be dictating retail prices.

  "In the traditional marketplace, wholesalers can't control what retailers charge," said Jonathan Potter, director of the Digital Media Association, a trade group representing online music startups. "Suddenly, in the digital world, the record companies want the exclusive right to control how many copies are made, the technology, the price - the entire consumer experience."

  Potter said the individual labels "have not granted one significant license" to other online distributors or shown an inclination to do so. What characterizes "significant" though, is a matter of debate.

  The individual labels argue that they have licensed music to Internet startups and continue to negotiate with others. But most of those licenses are for radiolike Internet services, limited sale of music videos, or digital storage-locker services that let consumers store their music on the Internet.

  It appears that in only two instances has a recording label licensed a large portion of its catalog to a startup for on-demand sale to consumers. In both cases that label is EMI, which industry analysts and startups seem to agree is the one label that has been significantly more willing than have its peers to negotiate with startups.

  EMI has licensed its catalog for use by two online companies -- Full Audio and Streamwave -- although neither of the two startups has yet made full use of the catalog. Streamwave and Full Audio both said they had found that the individual labels had negotiated deals in good faith.

  "Realistically, the negotiations have gone pretty doggone fast," said Jeff Trible, chief executive of Streamwave, who said he expected to close other deals soon. But he said he understood the labels' caution. "You're walking in the door of a multibillion-dollar company and trying to convince them to give you the rights to all their content."

  Cary Sherman, general counsel of the Recording Industry Association of America, which represents the labels in litigation, said the labels are "proceeding very cautiously in terms of entry into a brand new marketplace where the business models are uncertain, technological protections are still being developed, and impact on the rest of their business unknown."

  Active discussion

  Echoing the sentiments of other labels, a spokesman for BMG said: "Our record labels and music publishing company have licensed the BMG catalog to online services. Currently, we are actively engaged in discussion with numerous companies with respect to licensing our music."

  But Rob Reid, chairman and founder of Listen.com, a music site that is trying to compete with the labels, said the more limited deals reached by the labels -- those allowing a handful of songs to be sold for downloading, for instance -- were not relevant.

  He said the only deals that matter would be for a label's entire catalog, since that is what MusicNet and Pressplay could offer.

  One executive of a startup, who insisted on anonymity, said that for nearly a year he had negotiated with the labels but found them not genuinely interested in a deal. The deals they do offer, he said, are at such expensive royalty rates that they would ensure a startup's bankruptcy.

  "If you go back a year ago, there were 25 companies wanting to license music from them," the executive said. "Among them are many who are now dead and departed."

  Potter, of the Digital Media Association, said he hoped regulators would find that the labels had crossed the antitrust line "when they collectively don't sell to anybody else, then open their own stores."

  But how the Justice Department will weigh the evidence is very difficult to predict, said Eric Scheirer, a music industry analyst with Forrester Research. Antitrust law comes down to very technical issues, he said, and it is unlikely the government will find a "smoking gun," like correspondence among label executives encouraging one another not to sign deals with startups.

  But Scheirer said the mere existence of an inquiry, coupled with growing pressure from Congress, could affect behavior. "Seen through a political lens, it is calculated to encourage the industry to solve this in the marketplace -- to create a wider legitimate marketplace."
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