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Probe may delay change in digital-music prices

New York State begins inquiry as labels increase pressure on online music stores to change their standard 99 cents per song pricing structure.

A New York state antitrust probe of record labels' digital-music pricing is coming at a critical time for the online music business and could delay a move away from the industry's familiar price tag of 99 cents per song, legal experts say.

The investigation, launched by New York Attorney General Eliot Spitzer in late December, was revealed by the Warner Music Group in a federal securities filing last month. All four big labels, including Sony BMG Music Entertainment, EMI Music, Universal Music Group and Warner, have confirmed they've received Spitzer's requests for information, which represent a preliminary stage of investigation.

A trade group for digital-music services said Tuesday that its members have now also received information requests.

"Everybody expects to be contacted, and some already have been," said Jonathan Potter, executive director of the Digital Media Association, which represents companies including Yahoo, Apple Computer and America Online. Potter said the inquiry has the potential to be "full-blown."

News.context

What's new:
New York state's antitrust probe of digital-music pricing has stalled record labels' plans to move away from the 99-cents-per-song standard fee set by Apple.

Bottom line:
Some in the music industry view the antitrust probe as a warning to the labels not to collude on pricing, but observers also say the prospect of further investigations could dampen enthusiasm for changes in the per-song pricing structure.

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The DiMA director declined to specify which member companies had been contacted. Several Net companies, including Yahoo, Napster and Apple, also declined to comment on whether they had received requests from Spitzer's office. A representative for Spitzer also declined to comment. A Warner representative said in a statement that "as disclosed in our public filings, we are cooperating fully with the inquiry."

The probe comes at a crucial juncture in the relationship between record labels and online music stores, a moment when the all-but-standard 99-cent, one-price-fits-all model pioneered by Apple's iTunes store has come under increasing pressure from the labels.

Music executives have said they want to be able to respond to market forces with more flexibility, such as charging more than 99 cents for top singles, or less for slow-moving older songs.

Apple has said the simple and accessible iTunes pricing structure helps introduce new consumers to digital music. And in September of last year, Apple CEO Steve Jobs said that if the labels want to raise prices, "it means that they are getting greedy."

Currently, labels charge a variety of wholesale prices that can range upward of 75 cents per track, industry sources have said. However, it's the retailer, such as Apple, Walmart.com, or RealNetworks, that decides what price individual consumers will pay.

In recent weeks, online-music executives have said they expect at least one record label to begin experimenting with variable wholesale pricing early in 2006. But some said the Spitzer announcement could now change that plan.

A source familiar with the investigation said Spitzer was focusing on labels' pricing decisions and is seeking e-mails and other communications that deal with setting prices for online sales.

Under state and federal antitrust laws, record labels are not allowed to work together to set prices for music. Any evidence that executives had agreed to offer similar terms or wholesale prices to companies like Apple and Napster could trigger an antitrust lawsuit against the companies.

Just a warning?
Spitzer's investigation marks the second time in recent years that the big labels have been under a legal microscope specifically for their digital-music dealings. (They've also settled CD price-fixing charges with the Federal Trade Commission and state attorneys general, and two labels have settled with Spitzer's office over payola charges.)

In 2001, following the creation of two separate label-backed digital-music services, federal antitrust investigators launched an investigation into whether labels were working together against competing online services. That inquiry closed two years later with a statement from the Department of Justice saying investigators had found no evidence of pricing collusion.

Much has changed in the past four years, however. Record labels have seen their CD sales fall substantially, despite a slight uptick in 2004. Apple's iTunes has meanwhile sold hundreds of millions of songs, while capturing and retaining a more than 70 percent share of the market for digital-song sales.

Perhaps significantly, there have been few recent calls from online-music companies for this kind of antitrust inquiry, compared with a full-fledged lobbying effort in the early part of the decade. Many in the industry said Spitzer's action had come as a surprise, compared with the Justice Department's previous investigation.

Attorneys speculated that Spitzer could be issuing a warning to labels--several of which have made it clear they want wholesale pricing changes--that they can't pursue these changes together in any way.

"This may simply be a shot across the bow," said Michael Graham, an attorney with Marshall, Gerstein & Borun in Chicago. "Spitzer may be saying, 'Guys, we've caught you twice before, and we know you would never try it a third time, but we're going to make sure.'"

Even in the absence of illegal cooperation among the labels, the investigation could dampen the labels' enthusiasm for industrywide pricing changes in the near future, some legal experts said.

"We don't have any evidence that they were planning to collude," said attorney Christopher Norgaard, of Ropers Majeski Kohn & Bentley in Los Angeles. "But now they have to realize that what they do is going to be under the potential spotlight of Spitzer's office and anyone else who might be watching."

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