Tuesday, May 15, 2007

PRICING: Spitzer looking at wholesale price collusion in music industry

This is a fascinating development -- it looks like the big music companies are
resolving into a wholesale-retail pricing relationship with the online music
services -- but with a twist -- they are negotiating in agreements which say
that if any music service pays one of them more for a song, they have to pay
more to the others, too. Eliot Spitzer apparently thinks that's violates
antitrust laws. What do you think?

Also, it appears that they transfer the digital objects to the music services,
who then sell them. If they just saved all the digital objects on their own
servers and sold them in real time, they wouldn't have to have these one-off
contracts. They could just set their wholesale price -- using Clickshare, and
that would be it. Simple.

-- bill densmore


SUMMARY AT PAIDCONTENT.ORG posted Jan. 12, 2006:

Subscription Service Pricing Under Scrutiny [by staci] : The Journal has a
slightly odd story about "most-favored nation" status and pricing. Maybe it
just reads odd to me because I've dealt with MFNs for years in cable
programming so I'm not surprised to see it at work in music. For purposes of
this discussion, MFN -- and please send me a better explanation if you have one --
is a clause in a contract that usually means no one else can have a better deal
than that content provider. For instance, if you agree to pay me 50 cents a
song wholesale and then agree to pay someone else 51 cents a song, you have to
up my price to 51 cents. On the other hand, if I don't have an MFN, you could
pay someone else $1 a song and I'd be stuck at 50 cents -- until it's time to
renegotiate.As longtime readers know, I'm very interested in variable pricing
and how prices are set. I've spent a lot of time in the last few days looking
at video pricing issues and will be writing more about it soon. In the interim,
the clearest aspect of all of this is that NY state attorney general Eliot
Spitzer sees a good opportunity here and he isn't going away anytime soon.


Digital-Music Officials
Criticize Subscription Prices

January 12, 2006; Page B2

While New York Attorney General Eliot Spitzer investigates possible price
collusion in the music-download business, some in the industry are complaining
about pricing tactics used by the major record labels in another corner of the
digital-music world: subscription services.

Mr. Spitzer's preliminary investigation appears to focus on wholesaling music
to a la carte services that sell individual songs for 99 cents apiece, such as
Apple Computer Inc.'s iTunes Music Store. To collect information, Mr. Spitzer
has issued subpoenas to the four major music companies: Vivendi Universal SA's
Universal Music Group, Warner Music Group Corp., EMI Group PLC and the Sony BMG
venture between Japan's Sony Corp. and Bertelsmann AG, of Germany.

Several current and former executives of digital-music companies believe that
significant anticompetitive pricing practices by the major music companies take
place in the subscription arena, where listeners get access to an unlimited
amount of music for a flat monthly fee. Yahoo Inc., RealNetworks Inc. and
Napster are among the biggest operators in the music-subscription field.

The concern is that, when selling their music to subscription services, music
labels engage in what may amount to a passive form of collusion, resulting from
their use of "most favored nation status" clauses, as they are known in the
trade. Unlike downloading services -- in which labels sell songs to retailers
for a set wholesale price -- the prices charged to subscription services are
derived from complex licensing agreements. The most-favored-nation clauses, or
MFNs, seek to ensure that if a rival label negotiates better deal terms, the
label with most-favored-nation status gets the same terms. Critics say that,
because all of the major labels have sought or secured such clauses from
subscription-music services, the result is anticompetitive.

Most-favored-nation clauses are often used by retailers to secure lower
wholesale prices for products. For some, the concept causes greater concern
when it is deployed on behalf of suppliers. "Seller-side MFNs are inherently
price-increasing and anticompetitive," says Jonathan Potter, executive director
of the Digital Media Association, a trade organization whose members include
Apple, Yahoo, Time Warner Inc.'s AOL, Microsoft Corp.'s MSN, RealNetworks,
Napster, Viacom Inc.'s MTV, and MusicNet Inc.

Executives of the subscription services are barred by confidentiality
agreements from discussing terms of their agreements with the music companies.
Most said they hadn't been contacted by Mr. Spitzer's office. A representative
for Mr. Spitzer didn't respond to a request for comment.

The extent to which the music companies seek MFNs appears to vary, people
familiar with the industry say, with the biggest companies -- Universal Music
Group and Sony BMG -- acting more aggressively than their smaller counterparts.
A prime example of an MFN can be found in a term sheet circulated by Universal
Music Group. The document covers a number of licensing terms, including
pricing, digital-rights management and accounting. Its final line effectively
undermines the need for Universal to negotiate any of these points
aggressively: "UMG will receive an MFN for all material terms."

In a statement, a Universal spokesman said: "Universal is committed to
providing our artists with the best possible service and this includes
protecting them as their music is used and exploited in new and different

Many music-service executives have questioned the legality of such contractual
provisions and generally fight to keep it out of final agreements. "Antitrust
enforcers seem to recognize most-favored nation as a red flag," says Albert
Foer, president of the American Antitrust Institute, an independent think tank.
"Not to say it's inherently illegal, but you'd want to take a closer look at
how it works and what the effects are."

Some music-company executives defend the use of MFNs, calling them legitimate
tools for delivering their offerings quickly to consumers in the rapidly
shifting and unpredictable world of technologies, without getting bogged down
in lengthy, nitpicking negotiations. Others say their companies seek the
clauses only occasionally, and rarely, if ever, enforce them.

In 2003, the Department of Justice closed without action an investigation into
whether the labels stifled competition in online music in part through the use
of MFNs. Online-music-service executives say that, despite their best efforts
to rebuff MFNs, some labels are pushing the clauses harder and trying to make
them more restrictive.

"The MFNs of a few years ago were not as aggressive," says Mr. Potter. At least
one global music company has begun trying to ensure in its contracts that it
can examine the terms of its competitors' agreements.

Write to Ethan Smith at ethan.smith@wsj.com


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