Justice Probes Music Firms' Pricing of Downloads

By Yuki Noguchi
Washington Post Staff Writer
Saturday, March 4, 2006

The Department of Justice has launched an investigation into the online music industry, looking into "possible anti-competitive practices" in the growing music download business.

Gina Talamona, a spokeswoman for the Justice Department, confirmed the antitrust division's interest in the case but declined to elaborate on the investigation.

The music production business is dominated by four powerful players: Universal Music Group, EMI Music, Warner Music Group Corp., and Sony BMG. A spokeswoman for Warner said last night in an e-mailed statement that the company had received a request from the Justice Department for information and would "cooperate fully" with the investigation.

The other three companies would not comment on the probe, but sources close to the investigation, who spoke on the condition of anonymity because the investigation is confidential, said the companies either have been or soon will be subpoenaed as part of the query.

The government's probe into the nascent music download business is surprising, given that it has about $1 billion in annual sales, compared with about $12 billion annually in the retail music business, said Phil Leigh, senior analyst with Inside Digital Media Inc., a Tampa-based market research firm.

The Justice Department's investigation could be a replay of an earlier government investigation. In 2000, many of the same companies settled an antitrust case with the Federal Trade Commission, which found the five largest distributors of recorded music guilty of forging marketing agreements that set artificially high prices for compact discs. That price-fixing arrangement may have cost consumers nearly $500 million over three years, the FTC determined, but it did not levy fines against the companies. State attorneys general later sued and settled with the music companies.

Late last year, New York Attorney General Eliot L. Spitzer subpoenaed the music companies, including Warner, which disclosed that investigation in a December Securities and Exchange Commission filing.

As more consumers shop online for music, the government may be concerned that the music industry will take some of their past practices into the digital age, Leigh said.

Music labels are under pressure to figure out new, profitable pricing models for the digital marketplace. In the past, companies charged between $12 and $15 on average per album, even though consumers complained that an album contains only two or three songs they wanted to buy. In the age of digital downloads, online stores like Apple Computer Inc.'s iTunes music service charge a flat rate of 99 cents per song, allowing consumers to just buy the songs they want, eating into the label's sales.

Labels would like to be able to charge "variable pricing," which would allow them to collect more for the higher-demand songs, Leigh said, but online stores don't want to raise their prices, and are resisting that pressure. Currently, for a 99-cent song, 72 cents goes to the label, and 8 cents to the publisher, leaving Apple's per-song profit margin at 19 cents per song, he said.

Apple, which dominates the music download industry with about 80 percent of the market, declined to comment on the case. Yahoo Music, the second-largest site, did not respond to calls requesting comment.

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