October 15, 2001 10:00 AM PDT

DOJ digs into paid music ventures

The Department of Justice is digging deeper into whether the recording industry has engaged in unfair licensing practices regarding online music, in a preliminary investigation into the possibility of antitrust violations.

The government last week sent civil investigative demands to a list of record labels, Internet companies and other initiatives between the music and online industries, according to two industry sources who were served. It is calling for meetings with executives and requesting documents detailing correspondence and proposals involved in licensing negotiations.

The government is also looking into whether the companies colluded to set discriminatory terms for digital licenses. The investigative demands are the civil counterpart to the subpoenas used in criminal cases.

"The DOJ has been sniffing around looking for enough information to justify an investigation," said Aram Sinnreich, an analyst at market research company Jupiter Media Metrix. "Frankly, I think it's justified."

The sources described the demands as both "broad," in terms of the number of companies reached, and "focused," in terms of the issues that the Justice Department has targeted. The investigation will dig into the operations of the two online music services--MusicNet and Pressplay--supported by the record industry and into the licensing terms offered for access to the labels' coveted song libraries.

The Recording Industry Association of America and MusicNet confirmed that they received the investigative demands and said they would be cooperating fully.

The recording and Internet industries have divided into two rival camps pushing digital music subscription services--MusicNet, supported by AOL Time Warner, Bertelsmann, EMI Group and RealNetworks; and Pressplay, which is supported by Vivendi Universal and Sony and has licensed music from EMI. MusicNet is already available to its two distribution partners, America Online and RealNetworks, and Pressplay is expected to launch by the end of the year.

The Justice Department's actions follow long-running complaints by online start-ups seeking to distribute music that the labels have acted to restrain competition.

The start-ups allege that the labels worked together to offer economically unreasonable licensing terms, a tactic that drove many companies out of business. The stalling tactic, they've said, was also a way for the labels to control their copyrights for the launch their own online music services.

The labels, on the other hand, claim that online start-ups never presented themselves as compelling businesses through which to resell copyrighted songs. Industry executives have criticized Internet companies for proposing to distribute songs free of charge in exchange for a cut in advertising dollars.

Record executives have consistently stated their belief in digital distribution--but not at the expense of jeopardizing the value of their copyrighted works.

Analysts were not surprised that the Justice Department would take the next step in its ongoing investigation of the recording industry. The investigation could become a catalyst for the industry to devise a self-regulatory solution to change the way copyrights are structured for the online world.

"It's clear that copyright itself is not framed in a way to allow services to be created for maximum effect for stakeholders and the listening public," said Eric Scheirer, an analyst at Forrester Research.

Scrutiny of the companies took a new turn last week when federal Judge Marilyn Hall Patel, who is presiding over the music industry's copyright suit against Napster, turned her own deeply critical eye on MusicNet and Pressplay.

"I'm really confused as to why the (record companies) came upon this way of getting together in a joint venture," Patel said in a San Francisco court hearing. "Even if it passes antitrust analysis, it looks bad, sounds bad, smells bad."

Patel is considering whether to open up the Napster case to look at the way the record companies have licensed music online, as the file-swapping service contends they have "misused" their copyrights. That argument, which theoretically could save Napster from paying damages for copyright violations, is still viewed as a long shot, however.

News.com's John Borland contributed to this report.

 

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