August 6, 2001 5:25 PM PDT

DOJ interest unlikely to quiet music standoff

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Facing a possible federal antitrust investigation, the major music labels have found themselves in an online music minefield.

According to several published sources, the Department of Justice has opened a preliminary investigation of the Pressplay and MusicNet online distribution joint ventures that are owned largely by the major record companies. The news comes just days after a new bill was introduced in Congress that would sharply scale back the labels' ability to control online music distribution.

The redoubled Washington, D.C., scrutiny is a sign that the oft-repeated pleas from independent online music companies are finally being heard in official circles. Music start-ups that have struggled for years to win rights to distribute major-label music online have long complained that the giants have acted anti-competitively.

Nevertheless, analysts say it's not a sign that anything is likely to change overnight in the marketplace.

"The threat of congressional intervention has hung over them for so long that this is just another issue," said Aram Sinnreich, an analyst with Jupiter Research. "I'm sure that the legal departments at the five labels and the two technology companies involved went over (the joint ventures) with a fine-toothed comb, trying to craft them so they are as unassailable as possible."

Representatives from MusicNet, Pressplay and the major labels declined to comment on news of the pending investigation. A source close to MusicNet said the venture had not yet received a request for information from the Department of Justice, a typical early step in antitrust investigations.

While not unexpected, news of the federal antitrust investigation does strike an ironic note for some in the industry. MusicNet, the joint venture between EMI Recorded Music, AOL Time Warner, BMG Entertainment and RealNetworks, and Pressplay, which includes Sony Music Entertainment and Vivendi's Universal Music, each were launched at a time when concern about congressional oversight was high.

With promises to wholesale their music to other Web sites as well, the two joint ventures aimed to show that they were not exclusive and that the labels could coexist with other companies distributing music online. So far the names of the independent distributors are still few, however. Pressplay has signed up Yahoo and Microsoft's MSN, while MusicNet has brought Napster onboard.

Each of the two joint ventures is slated to launch later this summer.

Smaller companies have complained that the labels have continued asking for unreasonable license fees even after starting these distribution ventures.

Executives have said that in aggregate, the labels have asked for 50 percent or more of a company's revenue for licenses to the recorded works. In addition, anyone trying to distribute songs online would also have to pay the publishers for their separate copyrights.

The labels have consistently cut side deals with independent companies, allowing them restricted rights to the music. EMI has been among the leaders in this, allowing songs in music lockers, mixed CDs on the Net, cell phone-based services, and others. Most of the others have also allowed portions of their catalogs to be distributed by third parties in sharply limited ways, however.

On Monday, Universal Music Group said it had inked a deal with Internet-based music-subscription service Streamwaves.com. Under the deal, Universal will license Christian-Gospel titles to be streamed on Streamwaves' music service, dubbed HigherWaves.

One Net music executive, who asked to remain anonymous, recently called these types of agreements "desperate companies doing desperate deals." His own company has balked at the price being asked by labels, believing it too high to sustain a lasting business, he said.

As yet, it's too early to tell how deeply regulators will dig into the labels' actions. According to a report in The Wall Street Journal, the Department of Justice will be investigating competitive problems raised by the two joint ventures, and looking more broadly at the labels' licensing practices.

Antitrust experts say that even such a "preliminary" investigation should be a genuine concern for the labels.

"Particularly when there is a new administration in town...when they open an investigation it is serious, and people will take it seriously," said Robert Lande, an antitrust law professor at the University of Baltimore. "That doesn't mean they'll necessarily open a case, of course."

The bill introduced into the House of Representatives last week addressed many of the same issues bemoaned by online music start-ups for the last several years, making licensing terms easier for these start-ups.

"It is essential that competition arise," Rep. Rick Boucher, D-Va., said in a press conference unveiling the legislation. He was joined by co-sponsor Rep. Chris Cannon, R-Utah.

The DOJ investigation was first reported in the San Jose Mercury News.

 

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