Price collusion for online music
The federal government and New York state attorney general are investigating collusion between the big four music companies in setting prices of online digital music files. The allegation is that the four (Warner Music Group, Sony BMG and Universal Music Group) have signed agreements with the distributors of digital music (like Apple's iTunes) in such a way as to guarantee that they all charge the same prices to consumers and that they get the same deal with the music companies. Of course, this mostly refers to Apple, which still controls around 80% of all downloads.
An article in Billboard ("Dept. Of Justice Probes Majors On Pricing", 3/2/06) explains the complaint in detail. The inquiry, the article says, is:
centered on the major labels' use of "most favored nation" clauses in deals with download and subscription retailers. Digital music service operators have complained that such clauses, which dictate that a label cannot receive pricing terms worse than its competition, are a tool for de facto collusion by the record companies. In some cases, the clause allows labels to audit the terms of deals the online retailers have with other record companies to ensure that they are receiving the best pricing terms possible, digital retail sources say. The probe is believed to be looking at whether anti-competitive practices are at play.
In addition, consumer groups in San Francisco and New York have filed suits against the big music companies for fixing the prices of both downloads and CDs.
This comes as digital sales are assuming a larger and larger role in the industry's finances. According to an article in the Financial Times ("US government questions online music pricing", 3/2/06) "Although legal digital downloads tripled last year to $1.1bn, and account for about 6 per cent of the industry's revenues, they have still failed to offset the continued decline in sales of CDs and the ravages of piracy."
In response, the Big Four are also trying to change the system of uniform pricing used by Apple and others, where sons are sold at 99 cents each. The music companies want to charge more for downloading current hits, something Apple is resisting. The contracts with Apple are being negotiated this month.
It's the classic case of a war between an oligopoly and an oligopsony (though in this case Apple is closer to a monopsony.
As a San Jose Mercury News article ("Music labels, Apple divided over pricing as talks approach", 4/2/2006) notes:
As the labels and Apple hash out their differences, Apple's market dominance likely puts it in the best position to dictate terms, analysts said. "The power balance at this point is probably still going to be on the side of Steve Jobs and Apple," Kleinschmit said. "Can the record labels really afford to pull their catalog from iTunes?"
