NY state attorney-general subpoenas record labels in download price fixing inquiry

UPDATE 27 December 2005 5:30 pm ET

Albany (New York) - In a pre-Christmas filing with the US Securities and Exchange Commission, Billboard magazine reported this morning, Warner Music Group acknowledged that it had received a subpoena last 20 December from the office of New York State Attorney-General Eliot Spitzer. According to the filing, the subpoena was in connection with an investigation into whether Warner colluded with its three major competitors - Sony BMG, Universal Music, and EMI - to raise the wholesale price they charge music download services such as Apple’s iTunes.

Late this afternoon, Sony BMG confirmed to TG Daily that it also received a subpoena from Spitzer’s office. A spokesperson for Spitzer told the Associated Press this afternoon that his office is conducting a "preliminary inquiry," which may take several months to develop into a full investigation.

At issue is the music publishers’ objections - many of which have been stated publicly - to the one-price-fits-all scheme adopted by iTunes and its competitors. Such a scheme, say officials with the record labels, disallows the economy of scale used elsewhere in the industry to enable publishers to determine both premiums and discounts. Negotiations between Apple and the four publishers have been ongoing since last summer, with neither side gaining ground or changing position. In September, in a speech to the Apple Expo in Paris, CEO Steve Jobs told the crowd that if the publishers intend to raise wholesale prices, "it just means they’re getting a little greedy...Customers think the price is really good where it is. We’re trying to compete with piracy... and say, ’You can buy these songs legally for a fair price.’ But if the price goes up a lot, they’ll go back to piracy. Then everybody loses."

Jobs’ comments prompted a heated response from Warner Music Group CEO Edgar Bronfman, Jr., who told attendees of an investors’ conference the following week, "There’s no content that I know of that does not have variable pricing. Not all songs are created equal...We want, and will insist upon having, variable pricing." Prior to Jobs’ comments, Bronfman had suggested at a CTIA conference that his company and others work with Apple to establish a variable pricing scheme. Last November, Bronfman’s counterpart at EMI, Alain Levy, went so far as to proclaim during a press conference that Jobs would back down and offer variable pricing by late 2006, simply because the record labels were gracious enough to have met with him in the first place.

Perhaps they said a little too much. Spitzer’s inquiry will apparently delve into whether the economy of scale to which Bronfman referred, and the variable pricing schemes the recording industry advocates, are not so coincidentally the same things.

While the industries involved, and much of the rest of the world, are enjoying a holiday week, it remains to be seen whether Apple could become an ally in Spitzer’s inquiry. Jobs has repeatedly defended his company’s right, and that of others, to serve as retailers that determine the prices they intend to charge customers. But Billboard also reports today that independent record labels have complained Apple may already have a variable pricing scheme in place at the wholesale level, offering major music labels far more in royalties - as much as 70¢ per download - than the 60¢ the indie labels are offered. Though Apple has yet to be revealed as the target of any inquiry, whether it cooperates with Spitzer’s office may depend upon how willing the company is to open its own pricing scheme to public scrutiny.

Last July, both Sony BMG and Warner Music paid millions in settlement fees to the State of New York, to end investigations by Spitzer’s office into alleged payola - illegally paying radio stations to promote their songs at the expense of others’. Spitzer is currently a Democratic candidate for the New York Governor’s office, to be vacated by Republican George Pataki next year.

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