By: Moses Avalon (Associate Writer)
2002-10-16
http://www.musicdish.com/mag/?id=6784

If you gleefully read last weeks story about the majors having to pay a $138 million fine for price fixing CDs, then the last laugh may be on you. If you're an artist or songwriter already bemoaning the fact that royalties are hard to come by in major label deals, then the Federal Trade Commission just made your worst nightmare come true.

In what the mainstream press is calling a "landmark decision," the Attorney Generals of 47 states and the FTC got together and are going to make the major record companies and several major retail record chains pay a mammoth fine for committing the high crime of trying to ensure that their businesses turn a profit.

Labels have been struggling for years with little in the black. A major label earns about $4 on every CD they sell and this must be countered against all their overhead and the many CDs they give away.

Starting in 1995 with the advent of the so called "super stores," places like Best Buy and others would happily sell CDs at or below cost just to bring in customers, only to sell them cheap electronics. "Bait and switch," as they used to call it, has always been questionable. But instead of punishing the budget stores', the Feds have decided to punish the labels for trying to keep the price of the CD up to its advertised retail price. Why? Well the labels are an easier target for a quick settlement says my inside sources. They've been badly beaten up in the press these past two years with the Napster issues and now the chickens have come home to roost.

In 2000, the Big Five got together and decided, as a group (and this is the important part) that they would refrain from giving the budget-stores the cool in-store pop-up cardboard cut-outs and in-store signings that you normally see at Tower Records and the like. And why should they? Should a store selling a CD for $11 get the same level of service that as a store selling a CD for $15-$20? The Feds apparently think so and have fined the Big Five $138 Million for not giving places like Best Buy the privilege of having a life sized cut-out of Britney Spears or Ozzie Osbourne in the store lobby. (Something apparently many stores wanted.)

Claiming that the withholding of in-store goodies was part of a scheme called MAPs (Minimum Advertised Pricing) the Feds said that this practice (widely accepted in the book publishing trade), was in violation of anti-trust laws and ordered labels to pay $62 million of the settlement in cold cash to the various governments of the 47 states where this took place. (It should be noted that the money goes not to consumers or artists, but to the local governments whose citizens where "victimized" by being forced to buy music at discount prices without the benefit of getting to look at the big in-store cut-outs.)

Now, call me madcap, call me the dickens, but does this seem right? On one hand, the California Judiciary is saying that they might draft legislation to make labels pay more money to artists, and then on the other hand, the Federal Trade Commission is ensuring that artists get less money by saying that the labels also have no recourse when trying to keep the retail sales price of their product up. (Artists are paid off a percentage of the retail sale price, remember?) Does anyone else see anything weird about this? Well, the Feds claim that because collusion amongst the Big Five was at the heart of the MAP policy, that makes it a conspiracy and, therefore, anti-trust.

The Big Five said they received no financial gain from the MAP policy, noting that the wholesale price charged to retailers was the same whether or not they participated in the policy and that it's the artist that will be most affected by this. And I half-believe them, for once. The Big Five do not think they did anything wrong but settled to defer higher costs in litigation. Regardless of the fact that labels have used this legal bullying strategy on their own artists to deter audits, it's basically still a high-brow form of extortion. And who will ultimately suffer? The industry as a whole; artists, writers, musicians, producers, EVERYONE. This will likely make other multi-national corporations, interested in investing in the US music business, take a harder look at the viability of it. Not good if you're someone like EMI or AOL trying to sell off your label.

The Feds say that after $62 in cash is paid, about another $75.5 Million will be paid in free CDs to be distributed to schools and the handicapped. These will likely be deducted from artists' recoupment accounts as "special free goods" and result in far lower royalty checks for this holiday season.

Here's the Butcher's Bill:

Losers:

Universal - $18 million in cash and $21 million in free CDs
Warner - $13 million in cash and $15 million in free CDs
BMG - $13 million in cash and $17 million in free CDs
Sony - $12 million in cash and $14 million in free CDs
EMI - $6 million in cash and $8.5 million in free CDs

(These amounts were based on market share.)

Winners:

Best Buy - stock closed at $22 that day, up from $18 as this years all time low.

47 State Departments - $62 Million.

For a long time I have wanted labels to see the error of their ways. But I never wanted this. Although labels anticipated a large settlement months ago and began slashing jobs to correct their budgets, I believe that we can expect far more lay-offs and fewer signings until they can recover from this slam dunk. This is what happens when you ask the government for help. It's like a box of chocolates.

In a related story, the FTC has decided to open talks with Parker Brothers, the makers of the game Monopoly. They intend to suggest new rules to the classic game tailoring it to the new millennium. Now, instead of winning the game when you acquire all the properties, you will instead be required to pay Parker Brothers all your money until you are broke. Then you can take that little silver boot and kick yourself in the ass for trying to have a successful business in the first place.

Moses Avalon Disclaimer:
This is not news... News is allegedly objective. This is anything but. This is about interpreting the news into information that you can use. The key to predicting the future is in interpreting the past. In real terms, this means understanding how the big players interpret their mistakes and their recent acquisitions.

Wake up. Price fixing is illegal. Period. Arew you saying you don't want to see anyone indicted for price fixing because 2 percent of the fix might go to some rock stars (if they don't get screwed by the labels accountings)? You probably dug 9/11 because of all the great opportunities to make money from all the music that came out of it.

This is another joke. How are the labels going to pay ME, for all my over priced music collection? I don't see em writing me out a check now do I? lol.

no shit fender. How about anyone who BOUGHT a cd in the years this was happening getting a cut? Maybe a Free CD day?? Free cds' to the tune of 68 million dollars? My head hurts too much to do the math, but that's a pantload of plastic.

The fine is there as a deterrent to future price fixing, not for reimbursing consumers. If you want to be reimbursed, start a class action civil suit. $15 million in lawers and court costs later you'll get your $.18 per CD (with a receipt) refund. Woo Hoo.

I don't feel sorry for the labels at all. This IS anti-trust, and I don't think we should encourage the labels to conspire together by NOT punishing them for violating antitrust laws, whether the judgements against them are beneficial to artists and consumers or not. They hurt those who broke the law--that's their only intention.

$138 million wont even dent their pockets

"An enemy of my enemy is my friend." Anything that can hurt the labels is a good thing.

The only thing I learned in my Business Law class two years ago...

"col·lu·sion Pronunciation Key (k-lzhn)
n.

A secret agreement between two or more parties for a fraudulent, illegal, or deceitful purpose."

Pressf8 took the words right out of my mouth. The fine is a deterrent to prevent future abuse.

And anyone suggesting that the judgment should have somehow benefitted the consumers...that's just plain ignorance. As consumers, we have choices. We can buy a CD for 19 bucks at the local mall, pay 12 bucks at Best Buy, or not buy it at all. Why should the labels be forced to pay reparations to people who bought expensive CDs? It's the choice of the consumer. If you don't want expensive CDs, don't buy them. The labels aren't holding a gun to people's heads, telling them "buy this CD or I'll pull the trigger." It all boils down to choice.

To everyone out there who bitches about high CD prices...I've got news for you. If you wanna screw the labels, you won't do it in a courtroom. Screwing the labels is simple...very simple. Stop. Buying. CDs. Don't whine about high prices, pay them anyway, then expect the labels to compensate you for your decision to do so. Stop. Supporting. The labels.

On a side note...there were other winners in this case...holders of Best Buy stock (normal folks like you and I). On a more personal note, I know someone who probably made a few grand that day.

" Starting in 1995 with the advent of the so called "super stores," places like Best Buy and others would happily sell CDs at or below cost just to bring in customers, only to sell them cheap electronics. "Bait and switch," as they used to call it, has always been questionable. But instead of punishing the budget stores', the Feds have decided to punish the labels for trying to keep the price of the CD up to its advertised retail price. "

Can someone tell me why "Bait and switch", as presented here, is bad? And why selling CDs at or below cost is bad? And why the Feds should have any fathomable reason to punish a business because it's prices are too consumer friendly?

Call me selfish, but I rather like it when I don't have to pay as much for a CD. Those of you who feel morally compelled to shell out more bucks, I'm sure there is a way to do it w/o dragging the rest of us along on your generosity trip.

Written by a truly brainwashed writer this post is offensive to anyone who has been following the improprieties committed by the record industry. They are guilty of collusuion, coercion, price fixing and governmental bribery. Their payout to artists is enemic and the higher selling prices do NOT equate into greater revenues for the artists. They just ensure more profits for the record companies. The percentage of royalties on sales is fixed in the artists' contracts regardless of the selling price. The more money gleaned from high prices, the more the industry claims it spent on making the sales and since the cost is taken out of the artists' percentage, none of this money is passed on to the artists. The accounting practices of the industry have always been subject to controversy. The fines they received are a JOKE!!! The portion of the fine that is paid in product is very offensive since the value of the fine is based on retail value, but the labels only lose the production cost of the product. Isn't it odd that all the cash fines are substantially smaller than the product fines? I think the FTC went easy on this pack of thieves.
Also, bait and switch does not apply in this case. It would if the stores advertised the best selling CDs for a low price, but when the consumer goes to the store they only have higher priced CDs in stock. Using CD prices to get folks into your store is NOT bait and switch.