Online Music Deals Probed
Eliot Spitzer's probe of the recording industry's dealings with online retailers is focusing on contract terms that guarantee competing labels get the same prices for their music, sources said Wednesday.
Critics of the labels' practices said they threatened the legitimate market for online music just as it was taking off, potentially raising the familiar 99-cent price customers pay for their tunes.
The New York attorney general last year issued subpoenas to major record labels as part of an investigation into whether they colluded to set prices for the music they sell online. Several people familiar with the probe said Spitzer was examining "most-favored nation" clauses in the labels' contracts with online music services.
Spitzer's office declined to comment.
But the head of the trade group for Internet music retailers said that the labels' insistence on pricing guarantees threatened the legitimate online music market just as consumers were beginning to buy, rather than steal, music online.
"Some of the major labels have proposed and re-proposed and insisted on the inclusion in their licenses of most-favored nations clauses which would grant that label the benefits and pricing negotiated by a competing label," said Jonathan Potter, executive director of the Digital Media Assn., whose members include Yahoo Inc., RealNetworks Inc. and Apple Computer Inc. "Collusion has never been known to lower prices."
Music industry executives, all of whom requested anonymity because Spitzer's investigation is ongoing, said the "most-favored" clauses are appropriate.
"The music industry wanted to establish the online marketplace as quickly as possible, but we didn't want to get bogged down in debates over prices," one executive said. "These clauses let us create a viable marketplace quickly, and then make sure all musical artists are equally compensated."
Sales of digital tracks more than doubled in 2005, climbing to 352 million, according to Nielsen SoundScan. But increases in the online marketplace have not offset declines in the overall sales of U.S. music albums, which fell 7% last year to 618.9 million.
Executives at some music companies said the most-favored clauses have not been activated. But executives at online music retailers said the clauses have been executed multiple times, giving some companies more favorable rates than those originally negotiated.
