Feds Rob the Record Labels Blind

If you gleefully read last weeks story about the majors having to pay a $138
million fine for price fixing CDs, then the last laugh may be on you. If
you’re an artist or songwriter already bemoaning the fact that royalties are
hard to come by in major label deals, then the Federal Trade Commission just
made your worst nightmare come true.

In what the mainstream press is calling a “landmark decision,” the Attorney
Generals of 47 states and the FTC got together and are going to make the
major record companies and several major retail record chains pay a mammoth
fine for committing the high crime of trying to ensure that their businesses
turn a profit.

Labels have been struggling for years with little in the black. A major label
earns about $4 on every CD they sell and this must be countered against all
their overhead and the many CDs they give away.

Starting in 1995 with the advent of the so called “super stores,” places like
Best Buy and others would happily sell CDs at or below cost just to bring in
customers, only to sell them cheap electronics. “Bait and switch,” as they
used to call it, has always been questionable. But instead of punishing the
budget stores’, the Feds have decided to punish the labels for trying to keep
the price of the CD up to its advertised retail price. Why? Well the labels
are an easier target for a quick settlement says my inside sources. They’ve
been badly beaten up in the press these past two years with the Napster
issues and now the chickens have come home to roost.

In 2000, the Big Five got together and decided, as a group (and this is the
important part) that they would refrain from giving the budget-stores the
cool in-store pop-up cardboard cut-outs and in-store signings that you
normally see at Tower Records and the like. And why should they? Should a
store selling a CD for $11 get the same level of service that as a store
selling a CD for $15-$20? The Feds apparently think so and have fined the
Big Five $138 Million for not giving places like Best Buy the privilege of
having a life sized cut-out of Britney Spears or Ozzie Osbourne in the store
lobby. (Something apparently many stores wanted.)

Claiming that the withholding of in-store goodies was part of a scheme called
MAPs (Minimum Advertised Pricing) the Feds said that this practice (widely
accepted in the book publishing trade), was in violation of anti-trust laws
and ordered labels to pay $62 million of the settlement in cold cash to the
various governments of the 47 states where this took place. (It should be
noted that the money goes not to consumers or artists, but to the local
governments whose citizens where “victimized” by being forced to buy music at
discount prices without the benefit of getting to look at the big in-store
cut-outs.)

Now, call me madcap, call me the dickens, but does this seem right? On one
hand, the California Judiciary is saying that they might draft legislation to
make labels pay more money to artists, and then on the other hand, the
Federal Trade Commission is ensuring that artists get less money by saying
that the labels also have no recourse when trying to keep the retail sales
price of their product up. (Artists are paid off a percentage of the retail
sale price, remember?) Does anyone else see anything weird about this?
Well, the Feds claim that because collusion amongst the Big Five was at the
heart of the MAP policy, that makes it a conspiracy and, therefore,
anti-trust.

The Big Five said they received no financial gain from the MAP policy, noting
that the wholesale price charged to retailers was the same whether or not
they participated in the policy and that it’s the artist that will be most
affected by this. And I half-believe them, for once. The Big Five do not
think they did anything wrong but settled to defer higher costs in
litigation. Regardless of the fact that labels have used this legal bullying
strategy on their own artists to deter audits, it’s basically still a
high-brow form of extortion. And who will ultimately suffer? The industry
as a whole; artists, writers, musicians, producers, EVERYONE. This will
likely make other multi-national corporations, interested in investing in the
US music business, take a harder look at the viability of it. Not good if
you’re someone like EMI or AOL trying to sell off your label.

The Feds say that after $62 in cash is paid, about another $75.5 Million will
be paid in free CDs to be distributed to schools and the handicapped. These
will likely be deducted from artists’ recoupment accounts as “special free
goods” and result in far lower royalty checks for this holiday season.

Here’s the Butcher’s Bill:

Losers:

Universal – $18 million in cash and $21 million in free CDs

Warner – $13 million in cash and $15 million in free CDs

BMG – $13 million in cash and $17 million in free CDs

Sony – $12 million in cash and $14 million in free CDs

EMI – $6 million in cash and $8.5 million in free CDs

(These amounts were based on market share.)

Winners:

Best Buy – stock closed at $22 that day, up from $18 as this years all time
low.

47 State Departments – $62 Million.

For a long time I have wanted labels to see the error of their ways. But I
never wanted this. Although labels anticipated a large settlement months ago
and began slashing jobs to correct their budgets, I believe that we can
expect far more lay-offs and fewer signings until they can recover from this
slam dunk. This is what happens when you ask the government for help. It’s
like a box of chocolates.

In a related story, the FTC has decided to open talks with Parker Brothers,
the makers of the game Monopoly. They intend to suggest new rules to the
classic game tailoring it to the new millennium. Now, instead of winning the
game when you acquire all the properties, you will instead be required to pay
Parker Brothers all your money until you are broke. Then you can take that
little silver boot and kick yourself in the ass for trying to have a
successful business in the first place.

Moses Avalon Disclaimer:

This is not news… News is allegedly objective. This is anything but. This is about interpreting
the news into information that you can use. The key to predicting the future
is in interpreting the past. In real terms, this means understanding how the
big players interpret their mistakes and their recent acquisitions.

By Moses Avalon @ Music Dish

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