Antitrust Probe of Online Music Plans

When does cooperation become collusion? When does collusion become anti-competitive? Investigators at the US Justice Department have begun asking such questions in regard to plans by major music labels to make their wares available on the Internet.

Musicnet and pressplay (formerly called Duet), two emerging—and likely, dominant—players in the online music business, are undergoing federal scrutiny for potential violations of antitrust law. MusicNet is a joint venture involving AOL Time Warner Inc. (parent company of Warner Music Group), Bertelsmann AG (BMG Entertainment), EMI Group PLC, and RealNetworks, maker of the popular RealPlayer audio/video software. Pressplay is a joint venture by Sony Corporation and Vivendi Universal SA, parent company of Universal Music. Together they encompass all of the music industry's "Big Five," who control 85% of the world market for recorded music.

Their plans have aroused suspicions in Washington (and in Europe) because they require an unprecedented degree of cooperation by the labels. Music from all of the Big Five's many subsidiary labels will reportedly be available from both enterprises, because marketing studies—and the pioneering work done by Napster—have proved that music lovers want everything available on one site. Providing essentially identical services while appearing to compete against one another may be too cozy an arrangement for federal regulators. Under US law, companies within a single industry are free to join trade associations for their mutual benefit, but they are not free to join forces to leverage their retail potential.

Although joint ventures in individual productions are now commonplace in the film industry, the delivery of finished products to consumers is still handled by distribution companies and individual retailers (theater owners). Similarly, recordings purchased at music stores have been delivered through a network of regional distributors and local retailers—a system that has tended to keep prices competitive, at least in the eyes of overseers at the Justice Department and the Federal Trade Commission.

Cooperating too closely in arranging supply or price is considered anti-competitive, but that is exactly what the major labels must do to make Musicnet or pressplay function as desired. (It's also what the Music Online Competition Act seeks to avoid.) They will also be selling directly to consumers, something that has traditionally been frowned upon by the government. Although there have been notable exceptions, the American system has historically favored separation of manufacturing and retailing—especially where huge conglomerates are concerned. General Motors, for example, doesn't operate its own chain of auto dealerships.

The Feds have usually said "no" to single ownership of both "water" and "pipes," but the Internet is making it possible for the Big Five to have exactly that. "They want either the direct relationship with consumers, or to be able to extract the economic value from the middlemen," industry analyst Ashish Singh told the Wall Street Journal. Bypassing distributors and retailers would add enormously to the music industry's bottom line.

Congressman Rick Boucher (D-Virginia), co-author of the Music Online Competition Act, has warned that Musicnet and pressplay are a "distribution duopoly." Representatives of the companies involved have stated that both enterprises will carry titles from independent labels and will work with other online music providers to create the widest possible exposure for their products. They have engaged antitrust attorneys in their plans from the beginning to make sure they would not run afoul of federal law, but many in Washington remain unconvinced. The Justice Department investigation is expected to continue into the fall.