In the wake of the digital download dramas, 28 states have filed a federal lawsuit against the Big Five diskeries and three of the nation’s largest record retailers, claiming they violated federal and state antitrust laws by conspiring to fix the price of CDs nationwide over the last five years.
The suit also seeks an unspecified amount of damages, which the states are still calculating, but are estimated to be somewhere in the neighborhood of $480 million.
Filed in U.S. District Court for the Southern District of New York, the action follows a recent settlement between the individual members of the Big Five — Warner Music Group, Sony Music Entertainment, Universal Music Group, BMG and the EMI Group — and the Federal Trade Commission, wherein the diskeries’ Minimum Advertised Price (MAP) policies were declared illegal (Daily Variety, May 11).
The FTC calculated that as a result of these policies, consumers have paid $480 million more than they should have for recordings over the past five years.
Under MAP policies, record manufacturers paid some or all of the costs for retail record stores to advertise certain albums. In return, the stores agreed to not advertise these albums for anything less than the lowest price set by the manufacturers.
In 1995, the diskeries added a clause to these contracts that forbade retailers to use their own funds to advertise albums at prices below those set by the record labels. Other consumer products, such as sell-through homevideos, are often used as “loss leaders” to increase traffic in retail stores. Many times, loss leaders are sold for less than the wholesale price, a price set by individual retailers.
While the diskeries admitted no wrongdoing, they agreed this spring to refrain from linking any promotional funds for retailers to specific advertised prices for the next seven years. The diskeries are also prohibited from making promotional monies conditional on the prices found in ads for which they don’t pay. They’re also forbidden to terminate relationships with any retailer based upon that retailer’s price.
While Sony and Universal refused to comment on the lawsuit, reaction from the other three diskeries characterized the action as, in the words of an EMI spokesperson, “without merit.”
“Warner Music Group continues to believe that MAP served a valid business purpose and benefited consumers by substantially furthering retail competition and that it was an appropriate and lawful practice,” a WMG spokesman told Daily Variety.
A BMG spokesperson echoed those comments: “We still believe that MAP was a legitimate and appropriate practice, and we’re confident that the courts will reach the same conclusion.”
Tower Records — one of the three retailers named in the suit (the others were MusicLand and Trans World) — refused comment because it had not received documents stating the exact nature of the firm’s involvement in the action.
Seen as stabilizer
More pointed in criticism was Philadelphia-based Universal One Stop veep/G.M. Ed Climie, who told Daily Variety, “MAP stabilized the entire industry.
“Chains like MusicLand, Warehouse and Trans World either went into or narrowly avoided Chapter 11. There was a steady erosion of mom-and-pop stores — about 1,000 of them went bankrupt in 1995 alone; anyone who didn’t use music as a loss leader was getting killed. MAP changed all that.”
Dave Crouch, G.M. of Rhino Records Westwood, an indie record retailer that’s not affiliated with the Warner-distributed reissue label of that same name, characterized Tuesday’s action as “mind-boggling,” “a witch-hunt” and “a red herring,” noting that under MAP the Big Five didn’t raise the wholesale prices of their records.
Despite what the FTC theorized, prices for CDs have gone up since May.
“It’s the price-cutters like Best Buy and Circuit City who wiped out the mom-and-pops,” Crouch said. “For once, the big labels were acting selflessly; they were actually trying to play fair.
“I personally volunteer to get up in front of that jury with a white board and a pointer and show people how it’s impossible for a store like ours to survive on the margins you’re left with when you sell a few hundred CDs a day. I mean, Ford makes a 50% margin on Excursions. The record business isn’t getting that.”
Joining the state of New York in the suit are Arizona, Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Mississippi, Missouri, Nevada, New Mexico, North Carolina, Pennsylvania, Rhode Island, Texas, Utah, Washington, West Virginia and Wisconsin. Puerto Rico and the Northern Mariana Islands also are party to the action.
Expect other states — such as California — to get in on the action shortly.