Saturday, January 14, 2006


BUSINESS MODELS: WSJ article reviews music pricing models for possible collusion


SUMMARY AT PAIDCONTENT.ORG posted Jan. 12, 2006:

Subscription Service Pricing Under Scrutiny [by staci] : The Journal has a slightly odd story about "most-favored nation" status and pricing. Maybe it just reads odd to me because I've dealt with MFNs for years in cable programming so I'm not surprised to see it at work in music. For purposes of this discussion, MFN -- and please send me a better explanation if you have one -- is a clause in a contract that usually means no one else can have a better deal than that content provider. For instance, if you agree to pay me 50 cents a song wholesale and then agree to pay someone else 51 cents a song, you have to up my price to 51 cents. On the other hand, if I don't have an MFN, you could pay someone else $1 a song and I'd be stuck at 50 cents -- until it's time to renegotiate.As longtime readers know, I'm very interested in variable pricing and how prices are set. I've spent a lot of time in the last few days looking at video pricing issues and will be writing more about it so!
on. In the interim, the clearest aspect of all of this is that NY state attorney general Eliot Spitzer sees a good opportunity here and he isn't going away anytime soon.

Digital-Music Officials
Criticize Subscription Prices

January 12, 2006; Page B2

While New York Attorney General Eliot Spitzer investigates possible price collusion in the music-download business, some in the industry are complaining about pricing tactics used by the major record labels in another corner of the digital-music world: subscription services.

Mr. Spitzer's preliminary investigation appears to focus on wholesaling music to a la carte services that sell individual songs for 99 cents apiece, such as Apple Computer Inc.'s iTunes Music Store. To collect information, Mr. Spitzer has issued subpoenas to the four major music companies: Vivendi Universal SA's Universal Music Group, Warner Music Group Corp., EMI Group PLC and the Sony BMG venture between Japan's Sony Corp. and Bertelsmann AG, of Germany.

Several current and former executives of digital-music companies believe that significant anticompetitive pricing practices by the major music companies take place in the subscription arena, where listeners get access to an unlimited amount of music for a flat monthly fee. Yahoo Inc., RealNetworks Inc. and Napster are among the biggest operators in the music-subscription field.

The concern is that, when selling their music to subscription services, music labels engage in what may amount to a passive form of collusion, resulting from their use of "most favored nation status" clauses, as they are known in the trade. Unlike downloading services -- in which labels sell songs to retailers for a set wholesale price -- the prices charged to subscription services are derived from complex licensing agreements. The most-favored-nation clauses, or MFNs, seek to ensure that if a rival label negotiates better deal terms, the label with most-favored-nation status gets the same terms. Critics say that, because all of the major labels have sought or secured such clauses from subscription-music services, the result is anticompetitive.

Most-favored-nation clauses are often used by retailers to secure lower wholesale prices for products. For some, the concept causes greater concern when it is deployed on behalf of suppliers. "Seller-side MFNs are inherently price-increasing and anticompetitive," says Jonathan Potter, executive director of the Digital Media Association, a trade organization whose members include Apple, Yahoo, Time Warner Inc.'s AOL, Microsoft Corp.'s MSN, RealNetworks, Napster, Viacom Inc.'s MTV, and MusicNet Inc.

Executives of the subscription services are barred by confidentiality agreements from discussing terms of their agreements with the music companies. Most said they hadn't been contacted by Mr. Spitzer's office. A representative for Mr. Spitzer didn't respond to a request for comment.

The extent to which the music companies seek MFNs appears to vary, people familiar with the industry say, with the biggest companies -- Universal Music Group and Sony BMG -- acting more aggressively than their smaller counterparts. A prime example of an MFN can be found in a term sheet circulated by Universal Music Group. The document covers a number of licensing terms, including pricing, digital-rights management and accounting. Its final line effectively undermines the need for Universal to negotiate any of these points aggressively: "UMG will receive an MFN for all material terms."

In a statement, a Universal spokesman said: "Universal is committed to providing our artists with the best possible service and this includes protecting them as their music is used and exploited in new and different ways."

Many music-service executives have questioned the legality of such contractual provisions and generally fight to keep it out of final agreements. "Antitrust enforcers seem to recognize most-favored nation as a red flag," says Albert Foer, president of the American Antitrust Institute, an independent think tank. "Not to say it's inherently illegal, but you'd want to take a closer look at how it works and what the effects are."

Some music-company executives defend the use of MFNs, calling them legitimate tools for delivering their offerings quickly to consumers in the rapidly shifting and unpredictable world of technologies, without getting bogged down in lengthy, nitpicking negotiations. Others say their companies seek the clauses only occasionally, and rarely, if ever, enforce them.

In 2003, the Department of Justice closed without action an investigation into whether the labels stifled competition in online music in part through the use of MFNs. Online-music-service executives say that, despite their best efforts to rebuff MFNs, some labels are pushing the clauses harder and trying to make them more restrictive.

"The MFNs of a few years ago were not as aggressive," says Mr. Potter. At least one global music company has begun trying to ensure in its contracts that it can examine the terms of its competitors' agreements.

Write to Ethan Smith at


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