The Future of Music: Antitrust and Digital Downloading Practices

“What the industry has accomplished is exactly what they didn’t need. They killed competition. Brilliant. The dream is over.”  As I read this closing remark in Wayne Rosso’s article entitled, “The Dream Is Over: Music Labels Have Killed Their Digital Future,” I marveled at Rosso’s simplistic and unequivocally conclusive declaration.  Although I agree with Rosso’s article, almost in its entirety, it reminds me vast pessimism and shortsightedness of many business persons within the music industry.

Rosso’s article spoke about the music industry digging itself into a ditch, exhausting its ability to adequately profit from digital music services.  Yes, this is undoubtedly true and has become a matter of common knowledge to anyone with even the remotest interest in music.  However, it is quite unimaginative to state that the music industry’s digital future is dead.

During an interview with Chicago Tribune journalist and author Greg Kot, Death Cab for Cutie’s drummer and producer Chris Walla eloquently surmised, “The Internet was either a revolution or an apocalypse depending on which side of the fence you’re on.” Although this comment addressed the band’s decision to move from an indie label to the majors, this statement carries profound insight into the ditch in which the music industry finds itself.

The seemingly bi-polar arguments regarding “traditional” digital distribution, i.e. selling digital downloads, reignited the inquiry into an antitrust lawsuit that has not yet been argued.  In the case of Starr v. Sony, major labels face the allegations that they have been conspiring to fix the prices and terms of digital music sales, violating Section 1 of the Sherman Act.  This case was originally dismissed because the court that the plaintiffs failed to present sufficient facts to support the antitrust claim.  As it stands today, however, this case was sent back to trial after the plaintiffs won the appeal.

In antitrust cases, under the Section 1 of the Sherman Act, any contract or conspiracy to fix prices or otherwise restrain trade in interstate commerce is illegal.  The most difficult obstacle in proving a conspiracy is to prove that the defendants were acting “from an agreement, tacit or express,” rather than acting independently.  This is often difficult to prove because evidence of analogous business behaviors may illustrate both conspiracy and common business practices amongst competitors.

The Starr plaintiffs claim that the big four –EMI, WMG, UMG, and Sony, which control over 80% of digital music sold in the US – conspired to fix the rate at which consumers must pay in order to download digital music.  The big four allegedly contracted to sell digital music to consumers via MusicNet – a platform that offers digital music subscriptions.  Although the Big Four sells digital music to consumers through other digital music providers, the music must sell at the same prices and with the same DRM restrictions as the terms set forth with MusicNet.

If the other digital music providers try to sell downloads on different terms and at different prices, the big four allegedly charges penalties to the violating digital music provider or terminates their licenses.  Moreover, the big four supposedly includes most favorite nation provisions in their license agreements, ensuring that “the licensor who signed the clause received terms no less favorable than the terms offered to other licensors.”  These provisions are known to lead to increased prices and to anticompetitive business practices.

According to plaintiffs, consumers originally needed to subscribe to MusicNet in order to buy digital downloads, requiring consumers to buy a yearly subsection costing $240 per year and requiring consumers to agree to unfavorable DRM.  After the big four began using MusicNet and like services to distribute music, the big four purportedly agreed to set a wholesale digital music price floor at $0.70 per song.

The plaintiffs argue that this conspiracy limits the availability of digital downloads, forces digital music to sell at non-competitive prices, and imposes unfavorable DRM restriction on consumers.  The plaintiffs compare the big four’s arranged conduct with other available and competing services that sell music at cheaper rates.  Digital music sellers such as eMusic, the largest distributor of music by independent labels on the Internet, charge $0.25 per song and songs are available without DRM restrictions.  Plaintiffs also note that the cost of manufacturing, packaging and distributing music in the physical form, such as CDs and vinyl, no longer exists.  The plaintiffs claim that these cost reductions mandate reductions in the price of internet music, which would be reflective of a competitive marketplace.

The Starr antitrust suit is voicing concerns that have been plaguing the music industry since the rise of digital downloading.  The Starr assertions, along with the continued rise of illegal downloading, should persuade record companies to lower prices, which should help to increase music sales and increase competition.

According to a study by one of the United Kingdom and Ireland’s biggest market research companies, creative industries – music, film and video game industries – could increase profits if companies provided lower prices.  The study tested various music, film and video game business models, as well as interviewing upward 1000 individuals over the age of 16, finding that consumers preferred to download content and would be willing to use subscription and advertisement based streaming services.  The study found that two-thirds of individuals interviewed admitted to pirating content, but those individuals said they are willing to legally buy content if the prices were more desirable.   Moreover, the study found that interest in legally purchasing digital downloads would grow if content sells for half the current per-track download rate (so around $0.49 instead of $0.99) and if the content is DRM free.

Although the idea that charging lower prices for digital downloads could lead to an increase in music sales is far from new or revolutionary, the idea has yet to embraced by the big four or by major digital music providers.  Consequently, the music that is most sought after is unavailable at these lower prices and will continually be obtained illegally.  So, in a way, Rosso’s conclusion is correct.  If the Starr case resurfaces, the outcome will have a great impact on the music industry’s digital business model.

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