The settlement comes after a probe by the Federal Trade Commission that was sparked during the FTC's investigation of the proposed combination of music and video retailer CDNow with the Sony-owned Columbia House music club--a proposal that fell through in March.
The five biggest record companies, which control about 85 percent of CDs sold in the United States, will revise advertising and promotion agreements with record stores to end anti-competitive policies, the FTC said today. The record labels won't pay any penalties.
The companies--units of Time Warner, Sony, EMI Group, Bertelsmann and Seagram--will drop for seven years what the FTC called coercive agreements requiring record stores to charge specific minimum advertised prices for CDs.
"There was no plausible business justification for this other than to get the prices up," FTC chairman Robert Pitofsky said at a press conference announcing the settlement.
The record labels introduced the minimum advertised prices in the early 1990s to squash a CD price war initiated by discount stores such as Best Buy, Circuit City and Target, the FTC said. The discount stores were selling CDs for $9.99, about $2 to $3 below the going rate, the FTC said.
In an attempt to jack up CD prices to previous levels, Time Warner's Warner Music unit, Seagram's Universal Music Group, Sony, EMI and Bertelsmann pressured record stores not to advertise CDs below a set amount, the FTC said. Many record companies had to comply because they would lose hundreds of thousands or even millions of dollars in advertising subsidies from the record companies, the FTC said.
The companies didn't admit wrongdoing.
Until today's settlement, recording companies routinely offered to pay for a store's advertising of particular CDs if the store agreed to sell them above a set price.
The "minimum advertised price" agreements aren't in themselves illegal. Suppliers may violate antitrust law, though, if they bar stores from engaging in discount advertising on their own, which the FTC said took place.
The FTC settlement comes amid music industry consolidation. Time Warner and EMI said in January that they would merge their music units to create the world's biggest record company. The transaction, which requires approval by U.S. antitrust enforcers, furthers industry concentration that has cut the number of major record distributors to four from six in less than two years. Universal became the current No. 1 music seller after its acquisition of Polygram, the parent of A&M Records.
Meanwhile, music video behemoth Viacom, the owner of MTV Networks and VH1 channels, is under a separate U.S. Justice Department antitrust probe. The department is reviewing whether MTV pressures major record labels to give MTV exclusive rights to air videos upon release.
Copyright 2000, Bloomberg L.P. All Rights Reserved.