US states sue music companies for fixing CD prices
Twenty-eight states among the US filed a suit last Tuesday against the five biggest record companies and two music retailing giants, accusing them of conspiring to fix CD prices. "This illegal action by record companies and retailers has not been music to the ears of the public," New York State Attorney General Eliot Spitzer said in a statement. "Because of these conspiracies, tens of millions of consumers paid inflated prices to buy CDs of artists including Santana, Whitney Houston, Madonna, and Eric Clapton."

The lawsuit, filed in the U.S. District Court in New York, alleges that traditional retailers pressured the record companies to set minimum advertising prices after a price war brought by discount retailers dropped the average price of CDs from $15 to $10. "Our nation’s business economy has been built on the notion of fair and free competition," Spitzer said. "When there is illegal activity to fix prices -- as was the case here -- the consumer is always the loser."

Defendants in the suit are Capitol Records, Sony Music, BMG Music, Universal Music, and Warner Music. On the retail side, defendants include Tower Records, Musicland, and Trans World Entertainment. Musicland also owns Sam Goody; Trans World operates retail outlets Camelot, Music & Movies, Planet Music, and Record Town.

A spokesman for music giant BMG said the company would prevail in the courts, adding that it did no wrong by implementing a policy known as minimum advertised pricing (MAP). Under that policy, retailers could not get advertising subsidies from the record labels if they advertised prices below the minimum price set by the label. "We still believe that the MAP was a legitimate and appropriate practice and we are confident that the courts will reach the same conclusion," said BMG spokesman Nathaniel Brown.

But the advertising subsidies totalled millions of dollars, in some cases making it difficult for a retailer to compete without them, the complaint alleges. "The effect of these anti-competitive agreements has been two-fold," the states wrote. "First, retail CD prices, which had been dropping, were stabilised and then raised industry-wide. Second, the oligopoly of defendant distributors was able to maintain high wholesale prices and margins for CDs. "As a result of both effects, consumers have paid higher prices for CDs."

Although the MAP policy allowed retailers to set CD prices at the level of their choice, it prevented them from advertising those prices in traditional media or even inside the store. The only place the lower prices could be displayed was on a small sticker on the CD case itself. "They appear to be trying to avoid the prohibition against retail price maintenance," said Peter Ward, an antitrust attorney.

Injurious competition -- the notion that price wars and the like are harmful to businesses -- is not a defense to anti-competitive behaviour, Ward said. "The market did degenerate into a significant amount of discounting and this is something that they didn’t like, but you cannot counter discounts with price fixing," Ward said. "The market is supposed to set the price." Although this is not a clear-cut case of price fixing, the effect of the MAP policy was to stabilise prices and as such it is vulnerable to antitrust law, Ward said.

The record labels, he said, acted as a "hub" from which retailers -- the "spokes" -- joined in a price fixing conspiracy. "A court’s going to have to find that the effect on the market was to impact re-sell prices," Ward said. "Price fixing is a cool deal, but you can’t do it."

The states’ action comes after the Federal Trade Commission issued a series of consent decrees in June involving the record labels’ MAP policies. "The MAP provisions were implemented with the anticompetitive intent to limit retail price competition and to stabilise the retail prices in this industry," the FTC wrote in an analysis of the settlement. "Prior to the adoption of these policies, new retail entrants, especially consumer electronic chains, had sparked a retail price-war that had resulted in significantly lower compact disc prices to consumers and lower margins for retailers."

But Ward said the settlement reached in the case between the FTC and the labels only required that the labels cease their MAP practices. There were no damages involved. "The states are looking for money to distribute to consumers somehow," he said. The states joining in the suit are Florida, New York, Arizona, Arkansas, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Mississippi, Missouri, Nevada, New Mexico, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Texas, Utah, Vermont, Washington, West Virginia, and Wisconsin. The states and two commonwealths -- Puerto Rico and the Commonwealth of Northern Mariana Islands -- are asking for unspecified damages.

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