FTC: No More Minimum Advertised Pricing on CDs

Retail prices of compact discs are likely to drop in the coming months, thanks to a Federal Trade Commission action ending an industry-wide price-support policy begun five years ago. On May 10, the FTC announced that it had reached an agreement with the "Big Five" of the music business—Time Warner Inc.'s Warner Music, Seagram Ltd.'s Universal Music, Sony Music Entertainment, BMG Entertainment, and EMI Group PLC—that will effectively end the practice of "minimum advertised pricing" (MAP) instituted as a response to music-retailing price wars in the mid-1990s. Under MAP, retailers were forbidden to advertise CDs below an established minimum, at the risk of losing millions of promotional dollars from the record labels.

MAP, in the FTC's view, is a form of price-fixing. The Big Five agreed to end the policy without admitting any wrongdoing, according to FTC chairman Robert Pitofsky. Spokespeople for at least two of the conglomerates continued to defend the policy while announcing its discontinuance. "We believe MAP serves a valid business purpose for our customers and the consumer and is an appropriate and lawful practice," said a Time Warner executive. A BMG spokesman echoed the sentiment: "While we continue to believe that MAP was a legitimate and appropriate practice, BMG looks forward to moving ahead and continuing to do what we do best: deliver great music to the consumer."

Pitofsky estimated that music lovers had overspent by as much as $480 million during the years MAP was in place, and emphasized his hopes that the decision will help "restore much-needed competition" to the music business. "Today's news should be sweet music to the ears of all CD purchasers," he stated. The FTC had been investigating the music industry's price-fixing policy for two years.

Antitrust investigators in his agency will be looking into minimum advertised pricing policies in other industries as well, Pitofsky noted. Schemes that "effectively eliminate the ability of dealers to sell at a discount" will be closely examined, he said. MAP has been standard practice in certain sectors of the consumer-electronics market for many years, despite the fact that the law prohibits manufacturers from dictating to retailers how products can be priced on their sales floors. Whether this will change in response to the FTC's action is unknown.

The music industry's anti-discounting policy was loose enough to allow some discounting, especially by smaller specialty stores not eligible to participate in co-op advertising. Sony Music, Time Warner, and BMG Entertainment continue to work both sides of the street by undercutting dealers through the Columbia House and BMG music clubs, which sometimes offer new and old releases discounted by as much as 80% off the suggested retail.

An immediate widescale reduction in CD prices in stores is unlikely, some retailers stated, but new releases by popular artists should debut in stores at lower-than-suggested prices as a way of pulling customers in. Under terms of the agreement, no new MAP policy may be written for the next seven years, and for the following 13 years the record companies may not tie promotional funds to advertised prices, or allow pricing considerations to affect their relationships with retailers. Dealers, in other words, are now free to set prices as they see fit.

Several observers noted that the music industry capitulated rather easily this time around with the FTC, possibly due to the fact that Time Warner's proposed merger with America Online must meet FTC approval, as must Warner Music's takeover of EMI. The music industry is estimated at $15 billion annually, of which the Big Five control approximately 85%. All have plans for making their products available online and bypassing traditional retailers completely.