The Justice Dept.'s "preliminary investigation" into the relationship between the major record labels and their nascent online digital-delivery services, MusicNet and pressplay, is moving into high gear, according to sources familiar with the investigation. And signs are that this may be no fishing expedition.
Sources say Justice now has 12 investigators working full-time on the case, which has been under way for more than six months. In mid-October, at least 10 so-called civil investigation demands (CIDs), or requests for documents, were shipped to key industry players, including MusicNet, pressplay, the Recording Industry of America, and the Big Five labels, as well as upstarts Listen.com and Rioport. Justice has asked for documents on a "broad range" of topics, according to two companies that received the letters. MusicNet, pressplay, and the RIAA confirmed they had received the letters but declined to comment on the investigation.
The Big Five labels -- Time Warner, BMG, EMI, Sony, and Universal -- control more than 80% of recorded music. And with the court-ordered demise of free file-sharing upstarts such as Napster, they face no serious competition to distribute content over the Internet (see BW Online, 10/26/01, "Bertelsmann Has Napster Stuck in Its Head"). The CIDs require that information be handed over to Justice within 22 days, according to one recipient. Antitrust experts say the deadlines alone indicate a sense of urgency. In general, companies have 30 to 90 days to fulfil CIDs.
HOLLYWOOD PARALLELS. A handful of tiny independents with an interest in music distribution are elated by the probe's stepped-up pace. They say the inquiry has buttressed their claims that they're wrongly being sidelined from the burgeoning digital music business, which Jupiter Media Metrix predicts will be worth $6.2 billion by 2006.
Privately, the indies see possible parallels to the famous Paramount antitrust case of the 1940s. In 1948, the Supreme Court found the Hollywood studios guilty of monopolistic practices and price-fixing, in part because they controlled both the content and the distribution chain. The ruling crushed the set-to-cinema grip the all-powerful studios once enjoyed.
"The Hollywood studio case shows that holding the copyright doesn't give the labels the right to own the distribution channel," says the CEO of a startup, who requested anonymity because his company is still seeking licensing deals from the labels. "The government is rightly wary of copyright holders controlling distribution."
With MusicNet and pressplay, the labels would own both the rights to the music and the online delivery vehicles -- a scenario similar to the studio case. But veteran antitrust lawyers, most of whom weren't willing to talk on the record about a pending legal matter, caution that the Paramount case may not be a road map for current antitrust doctrine.
ANOTHER PRECEDENT. Actually, the BMI antitrust case decision may be the most instructive, they say. In 1979, CBS complained that the schedule of royalty fees negotiated on behalf of songwriters and publishers by the American Society of Composers, Authors & Publishers (ASCAP) and Broadcast Music Inc. (BMI) constituted illegal price-fixing. But the Supreme Court rejected the claim, reasoning that the legal benefits of the arrangement outweighed the drawbacks. One benefit: The standard fees for ASCAP and BMI helped ease administrative burdens on radio stations and other licensees and helped enforce against unauthorized copyright use.
Such may also be the case with MusicNet and pressplay, which could help standardize security features and delivery mechanisms for the digital music world, says Steven Salop, a professor of antitrust law at Georgetown University.
A second key issue is whether the lack of competition is hurting consumers or songwriters and publishers. Proponents of file-sharing argue that the Internet is a medium for freedom of expression, where both free file-sharing and independents should be protected. But legal experts note that the law doesn't protect competitors per se, only competition in theory.
EURO-PRESSURE. Although the labels certainly haven't made it easy for independent music-subscription services to get licenses, a successful case will turn on whether the labels actively colluded to prevent competitors from obtaining licenses. "There doesn't appear to be contractual exclusivity," Salop says. "What's illegal is to make agreements that prevent competition."
That said, the big guys aren't out of the woods yet. MusicNet and pressplay also face an aggressive antitrust investigation in Europe. In June, EU Commissioner Mario Monti launched an inquiry into whether the labels are abusing their dominant position to create a duopoly. The EU hasn't shied away from using antitrust inquiries to push its vision of a competitive marketplace -- witness the roadblocks it put up to General Electric's merger with Honeywell, which prompted GE to withdraw it offer.
An interesting twist in the Napster case also could pose problems. On Oct. 12, Napster claimed in U.S. District Court that MusicNet and pressplay amount to a monopoly at least as dangerous to the marketplace as Napster's file-sharing network. Judge Marilyn Patel, who is handling the Napster case, has so far dismissed most of Napster's claims, but she seemed to take an interest in this allegation.
ALL IN THE TIMING. "I'm really confused as to why the plaintiffs came upon this way of getting together in a joint venture," Patel said when Napster presented its arguments in open court. "Even if it passes antitrust analysis, it looks bad, sounds bad, and smells bad." If Napster's antitrust case proceeds, it could open up a wide range of documents, previously off-limits, that could be embarrassing to the labels, or provide fodder for Napster's case.
In the end, timing may be everything. If the independents -- companies such as Listen.com, Rioport, and Full Audio -- can't sway trustbusters or a judge to intercede soon, by next year, MusicNet and pressplay will have clocked a significant head start over potential competitors. The more time that passes, the more likely the music labels and their online music services will hear a happy tune. By Jane Black in New York