Court finds record labels plotted to raise CD prices

by Nathan Hall

A groundbreaking court decision has ruled music fans will get cash back as compensation for inflated compact disc prices as early as next year.

Late last month, the world’s five largest record labels and the United States’ three biggest music retailers were found guilty of collusion and were ordered to pay consumers more than $143 million.

The New York attorney general first initiated the class action lawsuit three years ago, but attorney generals in 43 states and three U.S. protectorates later aided the case. Industry analysts estimate the settlement will break down to roughly $20 a person, with the remaining $76 million funneled into CDs distributed to charities and other nonprofit organizations such as public libraries and schools. Artists and songwriters will not be compensated for low sales associated with the increased prices of their CDs.

The legal decision found that Vivendi Universal, Sony Corp., Bertelsmann AG, AOL Time Warner and EMI Group Plc. illegally conspired with Musicland Stores Corp., Transworld Entertainment Corp. and Tower Records in a widespread industry practice called “minimum wage pricing,” which inflated CD prices between 1995 and 2000. The companies deny any wrongdoing.

Announcements explaining how U.S. consumers can participate in the payout will appear early next year. Under a proposal being considered, customers would receive a check after filling out a form similar to a state tax rebate.

The ruling drew mixed reactions from several University students.

“I think this is pretty cool,” said Greg Parker, a junior engineering student. “The check idea sounds like the easiest way to do it.”

Universal stated, “Continued litigation would only consume millions of dollars of company resources at a time when (Universal’s) executive energy and business focus are better spent providing consumers with compelling music.”

“I guess it’s better than nothing,” said Ian Harrison, a senior neuroscience student. “Personally, I think all of the music should go to charity. It’s tokenistic and I do not feel it is a very good use of the money. I would rather see this go into reducing prices later.”

“The Big 5” first instituted minimum wage pricing in order to combat 1990s discount-chain policy in stores, including Target, that sold CDs below cost in order to encourage bigger ticket item purchases. That pricing system meant the major record labels would trade lucrative advertising budgets with music stores in exchange for agreeing to sell CDs at a predetermined price.

The new terms of the fine stem from a May 2000 Federal Trade Commission agreement in which the record labels had agreed to halt minimum wage pricing for at least seven years. The labels disagreed that they had done anything illegal despite estimates concluding customers were overcharged by more than $500 million.

Minnetonka-based Musicland spokesperson Dawn Bryant declined to comment on the case. Best Buy – owner of Musicland, Media Play, Sam Goody’s and Suncoast – has made more than $19 billion in 2002 sales so far, according to Securities and Exchange Commission reports.

The London Guardian reported Great Britain’s Office of Fair Trade Investigation conducted a similar probe in September, with findings of minimum wage pricing and warned the parties would be fined if conditions did not improve.

Independents feel pinch

local independent record label executives say they feel negatively affected by the price fixing.

“The collusion was obvious and that just makes the markup even more for the independent stores,” said Tom Loftus, president of Minneapolis-based Modern Radio Records.

Loftus said independent record stores are stuck in a cycle, unable to compete with retail outlets selling below costs, while simultaneously being shut out of the advertising dollars reserved for minimum-wage-pricing chain stores.

“It makes it harder in general because it creates an industry standard of the focus not being placed on either the artist or the consumer’s tastes,” said Matthew St. Germain, proprietor of the Minneapolis-based label Freedom From Records. “Rather, it’s placed on the label and shareholders’ bottom line of making money and ‘creating’ a product to sell.”

The peer-to-peer option

the Recording Industry Association of America data shows that the years with the biggest price increases resulted in steady declines of actual CDs sold.

The San Francisco Chronicle reported that the settlement came four days after the Recording Industry Association of America launched multimillion-dollar advertising campaigns to convince music fans that file swapping is indeed theft.

Business pundits credit the record industry’s poor image for the rise of MP3 file sharing. Napster, on the other hand, has claimed CD sales actually increased during its heyday.

“I enjoy using file sharing, but the stuff I’m listening to on it isn’t something I would really buy anyways,” Harrison said.

The Department of Justice is currently meeting with Internet music entrepreneurs to discuss possible anti-trust law violations by the Recording Industry Association of America.

Online music providers who now compete with industry-backed sites such as MusicNet and Pressplay are concerned. Unlike popular free sites such as, the new label-backed sites offer a subscription plan like cable television. Start-ups argue that the Recording Industry Association of America refuses to grant them licenses, while the association counters that the businesses are simply unwilling to pay for them.

“File sharing hurts the (major labels) more because (consumers) have no allegiance to them,” Loftus said. “There is no reason to care.”

The St. Paul Pioneer Press reported that Apple Computers, unlike Microsoft, has refused to install Digital Rights Management software into its new computer models. The software restricts copyright infringement internally, which blocks file swapping altogether.

Business controversies

the New York Times reported last week that Bertelsmann, which controls Barnes & Noble, CD Now, Lycos, MusicNet and Random House, profited by selling millions of anti-Semitic books during the Nazi era, using Jewish slave labor extensively. Germany-based Bertelsmann reported more than $8 billion in sales in 2001. Bertelsmann purchased now-defunct Napster in November of 2000 for an undisclosed sum.

AOL Time Warner, which reported more than $38 billion in 2001 sales, is currently under Securities Exchange Commission investigation concerning possible accounting fraud charges. AOL also owns Columbia House and Turner Broadcasting.

The Associated Press contributed to this article.