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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Outsourcing the news: Coverage via India or no coverage at all?

More on outsourcing of reporting to India, from Andrew Murr at Newsweek,
and his Q&A with James Macpherson, owner of PasadenaNow.com:

"But on the other hand, I know what is being lost by the local newspapers
cutting back on their coverage and telling reporters they don.t have to go
to the city hall meetings any longer. That.s even worse."



California: Covering Local News From Where?

A small California publication is outsourcing its local news coverage.to India.
How it plans to cover city-council meetings from afar, and why local
journalists are unimpressed.


By Andrew Murr

Updated: 7:25 p.m. ET May 11, 2007

May 11, 2007 - Offshoring work to India is hardly new. But PasadenaNow.com,
until this week an obscure California online community magazine, has made news
by taking the concept a step further. Editor and publisher James Macpherson has
announced that he.d hired two reporters to cover Pasadena city government.from
Mumbai and Bangalore. Starting Tuesday, the pair, including a University of
California, Berkeley, journalism grad, will begin cranking out more than 28
stories a week between them. In exchange, one reporter will make $12,000 a
year, the other $7,200, for covering budget battles and zoning meetings in a
city of 146,000 best known for the Rose Bowl and Caltech.

Hiring foreign correspondents in reverse makes good sense to Macpherson, 51, a
longtime Pasadena resident. His two-year-old site, which gets 45,000 unique
visitors a month, has yet to turn a profit, and until now his news coverage has
consisted largely of press releases. But noting the wealth of material
available online.city council meetings are televised on the Internet and most
documents are posted.Macpherson borrowed the offshoring idea from his years in
the clothing business, where overseas manufacturing long ago became the norm.
In the first known instance of the offshoring of local news coverage,
Macpherson hired two of the reporters who responded to his ad on Indian
versions of craigslist.org. Now, a male staffer in Mumbai will cover city
politics over the Internet, while a woman in Bangalore will write features
about business and government based on interviews done by staffers in Pasadena,
which will be transcribed (in India) and e-mailed to the reporter.

Macpherson says the news has already netted him angry e-mails, mostly from
journalists. Area bloggers also seem wary. .The type of journalistic coverage
Macpherson is talking about really could be done by someone in another country,
largely because their "coverage" often consists of little more than glorified
press releases and parroting of the local media,. writes an anonymous blogger
called Centinel on Foothillcities.blogspot.com. Macpherson admits that the
long-range coverage may lose immediacy, but in a telephone interview with
NEWSWEEK.s Andrew Murr, he says that when local news organizations don.t
exhaustively cover city hall, there.s a role for his economical and
unconventional idea. Excerpts:

NEWSWEEK: How did you decide to cover city hall from India?
James Macpherson: Actually, it was the result of a number of observations. I.ve
been in the clothing business, and I.d manufactured overseas for many years, so
I understand how many talented people there are abroad. I also understand how
efficient it is, costwise. In Pasadena, our city council meetings are televised
on the Internet. They can be seen anywhere. Our mayor [Bill Bogaard] actually
watched a city council meeting when he was traveling in China, so I saw that
precedent. And also our city council meetings go until the wee hours of the
morning. Few reporters actually stay to the end of those meetings in person.
Put it all together, and I think we have a chance for somebody who is fresh. In
India, it is 7 in the morning, and from 7 until lunchtime they can watch,
analyze and transcribe exactly what happened. So I.m hoping it.s a much better
service for the citizens of this city than perhaps they.ve been getting.

So are the Indians just transcribing the meeting or writing stories?
They will write news stories, but the transcription element is important
because local journalists have been known to misquote, and I don.t want any of

Most city council coverage involves more than just filing reports on the
[weekly] meeting. How can a reporter in India do interviews?
Actually, they won.t. The interviews behind the scenes will be conducted by our
reporters here. Obviously, I have a great relationship with many of these [city
officials]. We will have interviews digitally taped and transcribed, and
they.ll be available for the individuals who report on the council meetings.
Also the council meetings' agendas are published online on Thursday along with
PDF attachments that give background. So by the time of the council meeting, I
will have had editorial meetings with these staffers so we will know exactly
what.s up for consideration.

Who are your new Indian freelancers, and how did you find them?
Right now we have two reporters, and I found them through Craigslist, using the
ones in Mumbai and Bangalore. We also have five transcriptionists [to make a
print record of the council meetings and transcribe interviews].

So how will it work in practice? They.ll be writing profiles without having met
or talked to the person or doing any interviewing themselves?
That.s right. I.ll be sending them information packets on the subject, JPEG
photographs and, as we go along, probably video, as well as transcripts of the
interviews themselves.

All together, what were their duties, and what are you paying them?
Well, both writers are responsible for producing two 500-word [news] articles a
day, six days a week, plus two feature stories each week, which will be a
little bit longer, probably 700 words. The most expensive reporter is getting
$1,000 a month, in U.S. dollars.

And the less expensive reporter?
That individual is getting around $600 a month, a little bit over.

Are their duties quite different?
No, the duties are pretty much the same. The difference is that the more
expensive reporter is covering the council. It.s harder news, and a lot more
factual research has to be done. In fact that individual is reading about 50
different newspapers and Web sites for Pasadena every single day even though
he.s in Mumbai. The other reporter is doing softer stories, more lifestyles.

And others are doing the transcriptions?
Yes. They are mostly medical transcriptionists. There.s a huge business in that
from the United States. So these people are very, very accurate. It sounds a
little bit like the Nixon tapes, in that you get every hum, er and hiccough.
But at least it.s really accurate. I.ve been using the transcriptionists for
months, off and on, because I.ve been overwhelmed by the amount of raw data we
have. And I.ve used data-entry [services] for our events calendar as long as a
year and a half ago. But it.s the advent of the reporters, which is just in the
last two and a half weeks, that has caught some attention.

Have their stories run yet?
No. They.ve been doing trial stories, but they haven.t run yet. I.ve been
editing and critiquing them. We are launching next week, on Tuesday.

Have you heard of anything similar in other news or community-news
No. I.ve heard of nothing like this . I have a lot of confidence I can control
these people properly and get good results.

Control them in a way you couldn.t control American reporters?
No. I mean control them as well as I can control a reporter that I.m paying
four times as much to write here.

That raises another question. How much are you saving?
I think it.s between three and four times depending on the reporter. Coming out
of the University of Southern California, many reporters want $3,000 a month
and they.ve never covered a real story for a local publication. And local
reporters are getting between $3,500 and $4,500, plus benefits. We.re online.
We have to be very lean and mean.

Are you paying the Indian reporters benefits?

Do you think the offshoring of news is going to catch on?
Good question. I can.t say. I know that to me it makes good sense when you.ve
got the kinds of dynamics we have in the city of Pasadena, where there is not
real in-depth local coverage to the degree there should be and where the city
makes all this information available over the Internet. I think we can do a
real community service here.

What kind of reception is your plan receiving? What are you hearing?
I.m hearing a lot from other journalists. They seem to be less than

Can you elaborate?
Any industry in which one introduces the topic of outsourcing, one becomes
perhaps the person not welcome in the room at the party. But for small
organizations, especially community organizations, it.s easy to collect the raw
information of interviews and pictures and video. It.s really hard to
professionally edit and manage that information. And that.s what I am
attempting to do in a low-cost way. I think I.ll serve my readers better in the
long run.

How are your staffers in Pasadena taking it?
We.re a really small staff, and none of them is in any danger of losing their
job. That being the case, they are a little more open-minded, and they are
willing to give it a go.

I see myself as a producer, and these people as the actors in the sense that I
am going to carefully manage what they produce. I have lived here all of my
life. I know many of these officials personally. This is not handing the
analysis function off to someone who isn.t an American. This is handing off
just the vast bulk of a seven-hour meeting and having enough experience to
know, "Hey, we.re onto a prime topic. I was briefed. This is a big thing. Now
let.s sit up and listen and watch carefully." I believe it can be done
efficiently this way.

Do you feel something.s lost in the fact that your reporters have never been to
Pasadena and don.t know what the local issues are beyond what you tell them?
The answer is yes. But on the other hand, I know what is being lost by the
local newspapers cutting back on their coverage and telling reporters they
don.t have to go to the city hall meetings any longer. That.s even worse.

URL: http://www.msnbc.msn.com/id/18619929/site/newsweek/


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