Visions of an online music cartel?

Universal Music may have reached out to competitors to talk about prices, risking the wrath of federal regulators. The long-simmering feud with Apple could have driven them to do it.

U.S. law often comes down hard on price fixing. That's why a magazine story in October about efforts to create a music subscription site potentially backed by the top four music labels may have sounded alarms in Washington.

Universal Music Group and Sony BMG Music Entertainment have received requests for information from the U.S. Department of Justice about a proposed music site called Total Music. The DOJ interest comes after an October BusinessWeek story that said Doug Morris, Universal's CEO, pitched an idea for a subscription site to at least two of his three main competitors, Sony BMG and Warner Music Group. A source with knowledge of the discussions told CNET News.com that Universal Music also went to The EMI Group with the plan. This, say antitrust attorneys, was sure to raise eyebrows at the DOJ.

digital music

"Let's say Ford and GM decide to get together to sell cars," said Bob Lande, a professor at the University of Baltimore Law School. "We would blink a couple of times and then we'd say, 'Hey, that's a cartel. You can go to jail for that.'"

So why would Universal Music risk backing an idea that might have the appearance of a price-fixing scheme, right in the middle of a feud with Apple? That feud with Apple could well be the answer.

In July, Universal Music considered not renewing a long-term contract that enabled it to sell digital music through Apple's iTunes, according to a story in the The Wall Street Journal. The record companies have long asked Apple CEO Steve Jobs for the ability to set their own song prices on iTunes. Jobs has refused, and the price for most songs remains 99 cents.

The music industry has been forced to wait for an attractive iTunes alternative to show up. Morris may have grown tired of waiting.

Besides talking to his competitors, Morris also approached Google, Microsoft, Facebook, and MySpace to gauge their interest in the subscription site, according to a source with knowledge of the discussions.

There isn't enough information available to determine whether any laws were broken in Universal's meetings with its competitors, said Lande, but he also added that his "gut instinct says that it sounds fishy."

"Let's say Ford and GM decide to get together to sell cars. We would blink a couple of times and then we'd say, 'Hey, that's a cartel. You can go to jail for that.'"
--Bob Lande, professor, University of Baltimore Law School

Perhaps the biggest problem for Universal and Sony BMG is that BusinessWeek reported Total Music would offer an all-you-can-eat music service for $5. The mention of a price, if accurate, indicates that the music labels may have discussed price. And that sounds like a potential violation of the Sherman Antitrust Act, Lande said.

The Sherman Antitrust Act makes it illegal for anyone to make deals to limit competition. Violations of the Act are felonies that can land someone in jail for up to 10 years, Lande said.

Lande said that in some cases even attempting to fix prices violates the law.

One source close to Total Music, who asked to remain anonymous because of the pending DOJ investigation, disputed BusinessWeek's assertion that prices have ever been mentioned.

What hasn't been answered yet is why Morris would attempt something that would definitely run into a legal roadblock. Is there any scenario whereby the record labels could partner to sell music together?

Lande said he could think of only one scenario: The music industry was allowed to form a body called the Broadcast Music Inc. BMI is a performing-rights organization that collects license fees on behalf of musicians, composers and other music artists from radio stations across the nation.

The group was allowed to form because it's impossible for a single music artist to police hundreds of broadcasters that might be playing his or her music. It also isn't an anti-competitive practice, Lande said. "I don't think the same application would apply (in the Total Music scenario)."

Dominick Armentano is a research fellow and free-market advocate at the Independent Institute, a think tank in Oakland, Calif. He believes companies should be allowed to do what they want in a truly free market--that includes price fixing. But even Armentano said that under current U.S. law, there's no way competitors can gather to discuss price. He could think of only one way that the music labels could legally go into business together.

"They could try to merge," Armentano said. "Mergers have been allowed to go through in the past and the companies have then been allowed to fix prices. But I doubt that the DOJ would allow them to do that either. That would violate Section 7 of the Clayton Act." That part of the Clayton Act, passed in 1914, is designed to regulate mergers and acquisitions whenever they might diminish competition.

Armentano, who has written books backing the idea that price-fixing companies would still compete with each other in other areas of their business, said charging higher rates also typically invites other competitors into the market.

What if competitors fix prices that are lower than anywhere else? Would the government smile on that?

Not a chance.

"The offense is fixing the price," Lande said. "You never get into high price or low price. If you fix the price you're violating the law. Judges don't want to get into what the price is now. The price might be $5 today but next month it might be $8 and the next month $10. All they want to know is whether this is price fixing."

 

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