Music industry takes heavy fire


October 2, 2002



The music industry is broken, and the major labels don't have a clue about how to repair it. This is the only conclusion one can reach in the wake of a $143 million settlement announced Monday in a nationwide price-fixing case that involved five major record companies and three giant retail chains.

And it isn't only fans and consumers who feel aggrieved.

Arriving in stores Tuesday, "The Last DJ," the new album from Tom Petty and the Heartbreakers, is a withering attack on the music business. In one song, Petty, who has famously crusaded for lower CD prices, bemoans the fact that "money has become king." In another, he sings, "Well, you may take my money/You may turn off my microphone/But you can't steal/What you can't feel/Can't stop the sun from shining."

Filed in August 2000 by the attorneys general of 41 states, the lawsuit let the sun shine in on how the five major record distributors--Bertelsmann Music Group, EMI Music Distribution, Warner-Elektra-Atlantic Corp., Sony Music Entertainment and Universal Music Group--strive to keep the price of new CDs artificially high.

The suit charged that between 1995 and 2000, these companies violated federal and state antitrust laws by conspiring with three national record-store chains--Trans World Entertainment (which operates Camelot Music, Coconuts Music & Movies and Strawberries Music), Tower Records and the Musicland/Best Buy stores--to block discounting, reduce price competition and set a standard minimum price for CDs.

The big chains share the blame with distributors. Stores such as Best Buy often sell new CDs at a loss to lure customers who may then buy more costly electronic goods. This practice, along with competition from Internet retailers, has driven hundreds of mom-and-pop music stores out of business, endangering the sort of businesses where the clerks know your name, can cheerfully make recommendations or answer questions, and will actually let you listen to any disc before buying it.

The settlement, which must be approved by the federal judge in Portland, Maine, who was overseeing the case, calls for $67.3 million to be distributed to states, which will then compensate consumers who overpaid for CDs. (Anyone with receipts for discs purchased between '95 and 2000 is eligible to file a refund claim, though the exact machinery for the process, which is sure to be complicated, has not yet been set.)

The major record companies also will have to give 5.5 million CDs valued at $75.7 million to schools, libraries and charity organizations in order to promote music programs. (Finally--a use for all those unsold Mariah Carey and Michael Jackson discs!)

Not surprisingly, the major labels all deny any wrongdoing. They say they simply opted to settle to avoid the costs of lengthy litigation. But this is actually the second time that the industry has settled rather than fight these charges--in 2000, the record companies reached a similar agreement to end a complaint by the Federal Trade Commission.

Setting aside the exact charges of these two cases, what the industry is clearly guilty of is a pervasive contempt for the Americans who support it to the tune of some $14 billion a year.

This disrespect is seen in three key areas, all of which have deceptively easy solutions that the labels must consider if they don't want to become extinct:

1. Set a reasonable price for CDs for all retailers (large and small), and eliminate wasteful promotional expenditures.

When CDs were introduced in the early '80s, the prices were higher than vinyl albums because the technology was new. The labels promised that the cost would drop once the new format became the norm, but that never happened.

It costs only pennies to manufacture the actual compact disc and its packaging. Retailers keep $2 or $3 from the price that consumers pay, while the artists are lucky if they get $1, after the label recoups a long list of expenses from the cost of videos to publicity photos to review copies. The record labels keep all the rest.

True, a substantial portion of that income goes to legitimate overhead costs. But an absurd amount of money is wasted on promotional scams. According to their own lobbying group, the Recording Industry Association of America, for every big hit, the major labels spend $6.3 million promoting at least 14 albums that don't succeed.

This figure includes questionable practices such as "pay for play," the system of paying independent record promoters to get songs on the radio--something that costs the industry an estimated $150 million a year.

Prodded by Sen. Russ Feingold (D-Wis.), Congress is considering legislation to curb the practice, and this is already having repercussions in the industry. (Jeff McCluskey & Associates, the Chicago-based independent promotion firm that is one of the most powerful in the country, recently laid off 10 veteran employees.)

Eliminating pay for play would be a good start for the industry and fans alike. A recent poll conducted by the Future of Music Coalition indicated that 68 percent of radio listeners want the government to consider laws ensuring that all musical artists have a "more reasonable chance" of getting radio play.

2. Respect the artists as well as the consumers.

Artists are also pushing for legislative reform, seeking to retool the standard recording contract. In another major settlement announced Monday, the Universal Music Group has freed Courtney Love, a leading crusader for artists' rights, from the record contract for her band Hole. The agreement came at the same time that Love settled her suit with the surviving members of her late husband's band, Nirvana.

Love's trial, which was set to begin this week in Los Angeles Superior Court, would have marked the first major legal challenge to the standard industry record contract. Love says these contracts are similar to the now-outlawed deals that major movie studios used to tie up actors and actresses for decades at a time. In joining the cause, she told the L.A. Times: "I could end up being the music industry's worst nightmare: a smart gal with a fat bank account who is unafraid to go down in flames fighting for a principle.''

She has vowed to fight on, pushing for national legislation and reform in the state of California.


3. Back off on issue of Internet music-trading.

While the labels have consistently failed to offer any exciting or viable model for online music, they continue to attack any Web site that encourages the swapping of music files.

The point has been made many times that online file-sharing only encourages people to sample new music; that many fans wind up buying the CDs that win their hearts, and that digital technology is no more of a threat to artists or the industry than cassette tapes were in the early '80s (though the labels tried to stop them, too).

Yet the industry has succeeded in crushing Napster. Now it has its sights set on other services such as Kazaa, Morpheus and LimeWire.

What would happen if the music industry embraced the Net, lowered CD prices, and began treating musicians and consumers with a modicum of respect? We'd all be singing a happier song--and maybe it would even be good for business.