Justice Department vs. Big Music

As reported last week, the US Justice Department has launched an anti-trust investigation of the music industry's strategy for online distribution. The probe intensified during the fourth week of October, with investigators presenting at least 10 "civil investigation demands" (CIDs) to participants in the music industry's nascent Internet ventures, MusicNet and pressplay.

Legal departments at the Recording Industry Association of America, Warner Music, EMI, Sony Music Entertainment, BMG, and Universal Music were given 22 days to respond to the letters, which seek information regarding possible collusion among the record labels in their efforts to shut out start-up enterprises from distributing recorded music over the Internet. The labels—known collectively as the "Big Five"—control 75–85% of the world market for recorded music. Legal experts commented that the short response time was indicative of a sense of urgency at the Justice Department, which typically gives companies under investigation 30–90 days to respond.

At issue is whether the music industry's dominant players have colluded to create a "duopoly" to control online distribution of music. High profile competitors like Napster have been neutralized by unrelenting legal action; others like MP3.com have been bought out. The result may give the music industry control of both content and distribution—a combination generally frowned upon by officials at government agencies such as the Justice Department and the Federal Trade Commission.

As several observers noted, the Feds like to encourage competition—at least in theory, if not always in practice. Shutting out competitors may violate principles established by the Supreme Court in a 1948 anti-trust case brought against Paramount Pictures. (In the 1930s and '40s, Hollywood studios operated their own theaters, only a few of which—such as the Fox Theater in Atlanta and the Paramount Theater in Oakland—survive with their original owners' names.) In that case, the court ruled that Hollywood studios were guilty of price-fixing and monopolistic practices because they controlled the content and the distribution chain. The ruling broke Hollywood's stranglehold on film distribution and opened up the movie market for hundreds of independent theaters. "The Hollywood studio case shows that holding the copyright doesn't give the labels the right to own the distribution channel," an Internet start-up executive told Business Week. "The government is rightly wary of copyright holders controlling distribution."

The Justice Department reportedly has 12 investigators working full-time on the Internet music case. However, they may not uncover actual contractual agreements between record labels that would unequivocally prove a conspiracy to prevent competition from start-ups. European Union commissioners are also looking into the music industry's online plans, and they aren't as concerned about uncovering explicit agreements as they are about major labels' using their dominant position to create a duopoly. EU desire to insure a competitive marketplace for music was behind the aborted merger of EMI and Warner Music Group, and later, of EMI and BMG.

Research firm Jupiter Media Metrix estimates that the online music business will be worth $6.2 billion by 2006.

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