The lawsuit was filed today by the National Association of Recording Merchandisers (NARM) in U.S. District Court for the District of Columbia. It claims that the "Big Five" recording company and its parent, Sony Corp. of America, are engaging in unfair competition and price discrimination to force brick-and-mortar retail chains to stock CDs by Sony Music artists that also contain Web links and that include promotional material for Sony's e-commerce sites.
The complaint also charges that Sony plans to uses its market muscle to push consumers toward buying CDs and digital music tracks from the soon-to-be merged Columbia House record club and online music retailer CDNow. Sony and Time Warner will each own a 37 percent stake in the combined company.
NARM argues that Sony is undermining retail outlets by taking advantage of its unique position as a content company, CD distributor and e-tailer to sell goods directly to consumers. The association is asking the court to issue an injunction to stop Sony from engaging in the combined practices.
"When you take those things together from a company the size of Sony's, you are seeing the beginning of a Net strategy that is designed to force retailers to direct customers to online stores that Sony owns or controls," said Pamela Horovitz, president of NARM, which represents more than 1,000 music retailers.
"In the case of the most recent Ricky Martin CD, for example, the retailers were never told that it has a link to a Ricky Martin Web site that allows the consumers to buy products from that site, but when you go to the site it's Sony Music's store," she added.
NARM also alleges that Sony is charging other retailers higher wholesale prices than it charges CDNow.
A Sony representative said the company is "not in a position to comment," as it hasn't received the complaint yet. Although another of Sony's divisions, Sony Music Distribution, is a member of NARM, it is not a defendant in the lawsuit.
The retailers' concerns only confirm Sony's potential for brandishing power in the digital music sector.
Although analysts and recording executives insist that record labels don't sell music--artists do--Sony is in a lucrative position to sell portable music players, home stereos and popular music through the Net. And Sony's electronic distribution dreams aren't confined to music. The company is banking on the online delivery of other content: games for its Sony PlayStation and movies by Sony Pictures Entertainment for play on its branded DVD players.
News of the lawsuit comes as the head of Sony Electronics outlined for the first time the company's plans to sell more hardware such as video cameras and digital music devices directly to consumers. Beyond conflicts between online and offline sales, the lawsuit could mean that Sony, and by extension AOL-Time Warner, could have trouble realizing the benefits of direct ties between content creation and distribution mechanisms.
Advances in technology have given rise to many new kinds of devices, including portable digital music players, but these gadgets are useless without content. Thus, manufacturers and content providers have increasingly been working together in a variety of industries to help expand the market for new devices more rapidly. Sony happens to own both pieces of the puzzle and thus is a powerful player in the music industry as technology paves the way for online distribution of content.
It hasn't always been that way, though. Last week, speaking on the issue of how Sony is trying to become a "broadband entertainment company," Teruaki Aoki, president of Sony Electronics, said that 10 years ago, Sony bought music and movie studios to provide content for its hardware. "We really didn't realize any synergies in the past 10 years," Aoki said of the acquisitions in an interview.
Now, Aoki said, "it's really time for us to exploit the synergies between the software and content and hardware by using the broadband network" to distribute content. Broadband refers to technologies such as DSL and cable modems that provide faster delivery of data over the Internet.
"I think we can enhance the value of content by having more and different ways of (distributing) content" to whatever unique devices Sony can come up with, he said.
The one piece missing in Sony's treasure chest is high-speed bandwidth. AOL-Time Warner has that aspect covered by combining AOL's entertainment content with Time Warner's broadband network. Time Warner also is building its archive of music through its proposed merger with EMI; EMI is one Big Five record label that is aggressively getting ready to let consumers download digital music tracks by signing Liquid Audio to encode its collection.
All of these factors only put pressure on Sony to quickly build its music empire, which hasn't gone unnoticed by the retailers that filed the lawsuit or by analysts.
"With Sony, convergence is always just around the corner--owning content on the motion picture side and the music side and then driving that content toward hardware sales," said Jim Penhune, a media and entertainment analyst with the Yankee Group. "They have been talking about it for over a decade and pouring money into it."
As with any record label, it would be hard for Sony to leverage all of its properties into a one-stop online shop for music, because there would be gaps in its offerings. But that is where CDNow comes in. CDNow can bring major-label content together online for digital distribution, so consumers can buy songs from all the artists they want in one place. When CDNow sells anything, Sony and Time Warner will get a cut.
"Sony is in a unique position to speed this along because they have the hardware," Penhune said. "The new mantra is about networking all this stuff together."
When Sony and Time Warner announced that Columbia House would merge with CDNow, the companies said: "CDNow shareholders will benefit from the new company's ability to leverage the cross-promotional strengths and full resources of Sony and Time Warner to lower its customer acquisition costs and boost its customer base, providing an e-commerce model with a sound economic basis."
Still, only Sony is the target of NARM's lawsuit.
"We don't object to a supplier wanting to be a competitor but (to the) practices (it uses) to get into the marketplace," Horovitz said.
News.com's Jim Davis contributed to this report.