DOJ Ends Antitrust Probe of Online Music

The U.S. Depart. Of Justice (DOJ) Tuesday closed its antitrust investigation of Pressplay and MusicNet, two joint ventures formed by the major record labels to distribute music over the Internet, concluding there is no threat of harm to consumers.

“The Division’s substantial investigation of Pressplay and MusicNet has uncovered no evidence that the major record labels’ joint ventures have harmed competition or consumers of digital music,” R. Hewitt Pate, head of the DOJ’s Antitrust Division, said in a statement. “Consumers now have available to them an increasing variety of authorized outlets from which they can purchase digital music, and consumers are using those services in growing numbers.”

Pressplay began as a joint venture of major labels Sony Music Entertainment and Universal Music Group, but recently was sold to software supplier Roxio. MusicNet is a joint venture of major labels Warner Music Group, EMI Group, and BMG Music, as well as RealNetworks, an Internet media company.

In its more than two-year investigation of Pressplay and MusicNet, the DOJ focused on whether the joint venture restrained competition with restrictive licensing terms for non-major labels.

“None of the several theories of competitive harm that the Division considered were ultimately supported by the facts. The Division found no impermissible coordination among the record labels as to the terms on which they would individually license their music to third-party services,” Hewitt said. “The development of the digital music marketplace similarly belies any concerns that the record labels used their joint ventures to stifle the development of the Internet music marketplace and to protect their present positions in the promotion and distribution of pre-recorded music in physical form.”

Both joint ventures launched their respective Internet subscription music services in December 2001. At the time of its launch, Pressplay offered to its subscribers music released by major labels Sony, Universal and EMI. MusicNet offered music released by Warner, BMG and EMI.

Although Pressplay allowed its top-tier subscribers an opportunity to download a limited number of songs that were capable of being burned to CDs or transferred to MP3 players, its base subscription package permitted only “streams” and restricted or “tethered” downloads. MusicNet also only offered “streams or tethered downloads.

A stream allows the consumer to listen to a song without capturing the song file on his or her computer. To listen to the same song again, the consumer must request that the subscription music service deliver the stream a second time. A tethered download, in contrast, resulted in having the song stored on the subscriber’s computer, but the file could not be transferred to portable devices or burned to a CD.

The subscriber could listen to the tethered download only via the computer through which he or she had accessed Pressplay or MusicNet. These services were widely criticized for their unappealing consumer offerings, and, not surprisingly, they attracted little consumer interest. Most analysts believe consumers want their music services “portable,” so that they take tunes with them and transfer them from one playback device to the next.

“The Division initially was concerned that the licensing by the major record labels to their own joint ventures might provide the major record labels an opportunity to collectively establish the terms on which they would license to third parties,” the DOJ statement said. “The joint ventures might also have permitted the exchange of competitively sensitive information relevant to each label’s licensing considerations.”

Those concerns, according to the DOJ, have now diminished or disappeared.

“Consumers can now download individual songs from a growing number of competing digital music suppliers, each of which offers songs from the music catalogs of all five of the major record labels,” the DOJ stated. “Consumers also have their choice of subscription-based music services that, for a monthly fee, allow subscribers to browse hundreds of thousands of songs, to listen to streams of an unlimited number of songs of their choice, and to download the particular songs they want to burn to compact discs or transfer to portable devices.”

The DOJ also considered in its investigation whether the major record labels used their joint ventures to suppress the growth of the Internet as a means of promoting and distributing music, in order to protect their present positions in the distribution of music on physical media such as CDs. Proceeding collectively could have allowed the major record labels to explore the use of the Internet to promote and distribute their music, without relinquishing control over the pace and direction of those activities.

“The poor quality and restrictive nature of Pressplay’s and MusicNet’s services at launch in December 2001 provided some support for this theory,” the DOJ report released Tuesday stated. “As time passed, however, both joint ventures released improved and more consumer-friendly versions of their services, and the major labels licensed their music to a broader array of third-party music services that compete on price and features. Consumers can now download individual songs from broad music collections offered by at least five such services, and might soon be able to choose among a dozen suppliers. The Division concluded from those developments that the major labels are not impeding the promotion and distribution of music over the Internet.”

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