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Yesterday, 28 states’ Attorneys General filed an antitrust suit against the recording industry’s five largest record companies and three retailers. The suit, which lists Capitol Records, Sony Music, BMG Music, Universal Music, and Warner Music as defendants, claims that these companies conspired with retailers at Tower Records, Musicland, and Trans World Entertainment to fix CD prices.
By the time this costly suit concludes, it is likely that music distribution will have undergone a fundamental transformation.
The suit centers on a practice known as “Minimum Advertised Pricing” (MAP). Under MAP protocol, the record company will not subsidize a retailer’s advertising expense if a retailer advertises the price of the CD under a distributor-specified level. MAP restrictions apply to print or electronic media ads as well as flyers inside of the store. The only ad permissible under MAP is a small sticker on the CD box.
The Attorneys General also contend that MAP has allowed distributors to inflate wholesale prices and margins for CDs. Although MAP does not force retailers to actually sell CDs at a certain price, the suit contends that restrictions on advertising, which is normally paid in full by the distributor, accomplishes this end.
This price fixing argument may be tempting given the inexplicable differential between the cost of CD production and the CD price charged to consumers. However, every retailer is charged the same regardless of locale or mode of sale, including many Internet retailers that offer discounted CD prices.
Thanks to today’s technology, consumers are presented with more options for music than ever before. Online CD sales grew by 136 percent at Amazon.com last year and more CD consumers are going online everyday. The Internet’s comparison-shopping model will bring down prices as discerning consumers comparison shop. Net revenue has as much to do with sales volume as it does profit margin.
Moreover, new distribution systems are coming into being. By the end of the year, EMI and Sony music will offer subscription-based downloadable music services. All of these realities makes the Attorneys’ General suit imprudent and anachronistic.
Once again, unnecessary litigation discourages desirable innovation. By the time this costly suit concludes, it is likely that music distribution will have undergone a fundamental transformation. Litigation cannot keep pace with today’s fast-paced technology; someone just needs to explain that to marauding Attorneys General.