Federal Register / Vol. 65, No. 96 / Wednesday, May 17, 2000 / Notices 31319

1BMG’s policy differed slightly. Under the BMG

MAP provisions, the suspension of all cooperative

advertising funding required a finding of two MAP

violations. However, BMG MAP provisions also

established a suspension of up to a year for repeated

violations.

TIME AND DATE: 11 a.m., Monday, May

22, 2000.

PLACE: Marriner S. Eccles Federal

Reserve Board Building, 20th and C

Streets, N.W., Washington, D.C. 20551.

STATUS: Closed.

MATTERS TO BE CONSIDERED: 

1. Personnel actions (appointments,

promotions, assignments,

reassignments, and salary actions)

involving individual Federal Reserve

System employees.

2. Any items carried forward from a

previously announced meeting.

CONTACT PERSON FOR MORE INFORMATION:

Lynn S. Fox, Assistant to the Board;

202–452–3204.

SUPPLEMENTARY INFORMATION: You may

call 202–452–3206 beginning at

approximately 5 p.m. two business days

before the meeting for a recorded

announcement of bank and bank

holding company applications

scheduled for the meeting; or you may

contact the Board’s Web site at http://

www.federalreserve.gov for an

electronic announcement that not only

lists applications, but also indicates

procedural and other information about

the meeting.

Dated: May 12, 2000.

Robert deV. Frierson,

Associate Secretary of the Board.

[FR Doc. 00–12489 Filed 5–12–00; 5:06 pm]

BILLING CODE 6210–01–P

FEDERAL TRADE COMMISSION

[File No. 971 0070]

BMG Music; Capitol Records, Inc.;

Sony Music Entertainment Inc.; Time

Warner Inc.; and Universal Music &

Video Distribution Corp., et al.;

Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreements.

SUMMARY: The consent agreements in

these five matters settle alleged

violations of federal law prohibiting

unfair or deceptive acts or practices or

unfair methods of competition. The

attached Analysis to Aid Public

Comment describes both the allegations

in the draft complaints that accompany

the consent agreements and the terms of

the consent orders—embodied in the

consent agreements—that would settle

these allegations.

DATES: Comments must be received on

or before June 9, 2000.

ADDRESSES: Comments should be

directed to: FTC/Office of the Secretary,

Room 159, 600 Pennsylvania Ave., NW,

Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT:

Richard Parker, FTC/H–374, 600

Pennsylvania Ave., NW, Washington,

D.C. 20580. (202) 326–3300.

SUPPLEMENTARY INFORMATION: Pursuant

to Section 6(f) of the Federal Trade

Commission Act, 38 Stat. 721, 15 U.S.C.

46 and Section 2.34 of the Commission’s

Rules of Practice (16 CFR 2.34), notice

is hereby given that the above-captioned

consent agreements containing consent

orders to cease and desist, having been

filed with and accepted, subject to final

approval, by the Commission, have been

placed on the public record for a period

of thirty (30) days. The following

Analysis to Aid Public Comment

describes the terms of the consent

agreements, and the allegations in the

complaints. An electronic copy of the

full text of the consent agreements

package can be obtained from the FTC

Home Page (for May 10, 2000), on the

World Wide Web, at ‘‘http://

www.ftc.gov/ftc/formal.htm.’’ A paper

copy can be obtained from the FTC

Public Reference Room, Room H–130,

600 Pennsylvania Avenue, NW,

Washington, D.C. 20580, either in

person or by calling (202) 326–3627.

Public comment is invited. Comments

should be directed to: FTC/Office of the

Secretary, Room 159, 600 Pennsylvania.

Ave., NW, Washington, D.C. 20580. Two

paper copies of each comment should

be filed, and should be accompanied, if

possible, by a 31⁄2 inch diskette

containing an electronic copy of the

comment. Such comments or views will

be considered by the Commission and

will be available for inspection and

copying at its principal office in

accordance with Section 4.9(b)(6)(ii) of

the Commission’s Rules of Practice (16

CFR 4.9(b)(6)(ii)).

Analysis To Aid Public Comment on the

Proposed Consent Order

The Federal Trade Commission

(‘‘Commission’’) has accepted

agreements containing proposed

consent orders from the corporate

parents of the five largest distributors of

prerecorded music in the United States.

The five distributors, Sony Music

Distribution (‘‘Sony’’), Universal Music

& Video Distribution (‘‘UNI’’), BMG

Distribution (‘‘BMG’’), Warner-ElektraAtlantic Corporation (‘‘WEA’’), and EMI

Music Distribution (‘‘EMI’’), account for

approximately 85% of the industry’s

$13.7 billion in domestic sales. The

agreements would settle charges by the

Commission that these five companies

violated Section 5 of the Federal Trade

Commission Act by engaging in

practices that restricted competition in

the domestic market for prerecorded

music.

The proposed consent orders have

been placed on the public record for

thirty (30) days for receipt of comments

by interested persons. Comments

received during this period will become

part of the public record. After thirty

(30) days, the Commission will review

the agreements and the comments

received and will decide whether it

should withdraw from the agreements

or make final the agreements’ proposed

orders.

The purpose of this analysis is to

invite public comment concerning the

consent order. This analysis is not

intended to constitute an official

interpretation of the agreement and

order or to modify its terms in any way.

There are five separate complaints

and proposed consent orders in this

matter, one of each of the distributors,

which are virtually identical with the

exception of minor variations related to

the corporate structure of each

respondent.

Analysis

The complaints allege that all five

distributors have engaged in acts and

practices that have unreasonably

restrained competition in the market for

prerecorded music in the United States

through their adoption, implementation

and enforcement of Minimum

Advertised Price (‘‘MAP’’) provisions of

their Cooperative Advertising Programs.

These five companies, which

collectively dominate this market,

adopted significantly stricter MAP

programs between late 1995 and 1996.

Under the new MAP provisions,

retailers seeking any cooperative

advertising funds were required to

observe the distributors’ minimum

advertised prices in all media

advertisements, even in advertisements

funded solely by the retailers. Retailers

seeking any cooperative funds were also

required to adhere to distributors’

minimum advertised prices on all instore signs and displays, regardless of

whether the distributor contributed to

their cost.

Failure to adhere to the respondents’

MAP provisions for any particular

music title would subject the retailer to

a suspension of all cooperative

advertising funding offered by the

distributor for an extended period,

typically 60 to 90 days.1 The severity of

these penalties ensured that even the

31320 Federal Register / Vol. 65, No. 96 / Wednesday, May 17, 2000 / Notices

most aggressive retail competitors

would stop advertising prices below

MAP. The complaints further alleges

that by defining advertising broadly

enough to include all in-store displays

and signs, the MAP policies effectively

precluded many retailers from

communicating prices below MAP to

their customers.

The MAP provisions were

implemented with the anticompetitive

intent to limit retail price competition

and to stabilize the retail prices in this

industry. Prior to the adoption of these

policies, new retail entrants, especially

consumer electronic chains, has sparked

a retail ‘‘price war’’ that had resulted in

significantly lower compact discs prices

to consumers and lower margins for

retailers. Some retailers, who could not

compete with the newcomers, asked the

distributions for discounts or for more

stringent MAP provisions to take

pressure off their margins.

The complaints allege that the

distributors were concerned that

declining retail prices could cause a

reduction in wholesale prices. Through

these stricter MAP programs, the

distributors hoped to stop retail price

competition, take pressure off their own

margins, and eventually increase their

own prices. The distributors’ actions

were effective. Retail prices were

stabilized by these MAP programs.

Thereafter, each distributor raised its

wholesale prices.

While some vertical restraints can

benefit consumers (known as

‘‘effciencies’’) by enhancing interbrand

competition and expanding market

output, plausible efficiency

justifications are absent in this case.

Beneficial vertical restraints encourage

retailers to provide better services to

consumers than would have been

provided to the absence of the restraint.

However, in this case, the distributors’

MAP policies provided no benefits to

consumers. In particular, the new

retailers that charged lower prices to

consumers provided services that were

as good as, and in some cases, superior

to the services provided by the higher

priced retailers they were moving to

replace. These policies were plainly not

motivated by ‘‘free-riding’’ concerns.

The substantial anticompetitive

effects of these programs, balanced

against the absence of plausible

efficiency rationales for them, give us

reason to believe that these programs

constitute unreasonable vertical

restraints in violation of Section 5 of the

FTC Act under a rule of reason analysis.

Although the Commission has

concluded that compliance by retailers

with these programs did not constitute

per se unlawful minimum resale price

maintenance agreements, it should be

noted that the MAP provisions

implemented here go well beyond

typical cooperative advertising

programs, where a manufacturer places

restraints on the prices its dealers may

advertise in a advertisements funded in

whole or in part by the manufacturer.

Such traditional cooperative advertising

programs are judged under the rule of

reason. American Cyanamid, 123 F.T.C.

1257, 1265 (1997); U.S. Pioneer

Electronics Corp., 115 F.T.C. 446, 453

(1992); The Advertising Checking

Bureau, Inc., 109 F.T.C. 146 (1987).

The market structure in which the

distributors’ MAP provisions have

operated also gives us reason to believe

that these programs violate Section 5 of

the FTC Act as practices which

materially facilitate interdependent

conduct. The MAP programs were

implemented with an anticompetitive

intent and they had significant

anticompetitive effects. In addition,

there was no plausible business

justification for these programs. E.I. du

Pont de Nemours & Co. v. FTC, 729 F.2d

128 (2d Cir. 1984).

The wholesale market for prerecorded

music is characterized by high entry

barriers which limit the likelihood of

effective new entry. In this industry, the

respondents can easily monitor the

pricing and policies of their

competition.

The history of MAP policies in this

industry also indicates a propensity for

interdependent behavior among the

distributors. All five distributors

adopted MAP policies in 1992 and 1993

that generally required adherence to

minimum advertised prices in

advertisements paid for by the

distributors. In 1995 and 1996, all five

distributors expanded the restrictions in

their MAP programs to require

adherence to minimum advertised

prices in advertisements regardless of

the funding source. In one case, the new

MAP provisions were announced four

months prior to the effective date.

During this four month hiatus, two other

distributors adopted similar provisions.

By the end of 1996, all five distributors

had adopted MAP provisions that were

virtually identical. Shortly thereafter,

several distributors embarked on high

profile enforcement actions against

major discounters who were

discounting prices; these enforcement

actions were widely publicized by the

trade press.

The Proposed Consent Order

There are five separate consent orders,

one for each company.

Part I of the proposed orders

establishes definitions. These

definitions make clear that the

provisions of the order apply to the

directors, officers, employees, agents

and representative of the five

distributors. This section also makes

clear that its provisions apply to

cooperative funding efforts regardless of

whether the retailer sells prerecorded

music in traditional retail stores or over

the Internet.

Part II of the orders requires all of the

distributors to discontinue their MAP

programs in their entirety for a period

of seven years. The Commission

believes this relief is necessary because

some of the challenged MAP programs

have been in place for more than four

years. Quite simply, it will take several

years without the MAP restrictions to

restore retail price competition.

Part III of the orders contains several

prohibitions to ensure that the

distributors are unable to maintain the

anticompetitive status quo in some

other way. Subsection a prohibits the

companies from conditioning the

availability of any advertising funds on

a retailer’s actual selling price.

Subsection B prohibits the distributors

from restricting the availability of any

advertising funds on the basis of an

advertisement funded solely by its

customers that do not adhere to the

minimum advertised price. Subsection

C prohibits the distributors from making

payments that exceed the retailer’s

promotional costs to ensure compliance

with any MAP program. Subsection D

prohibits the distributors from

controlling their customers’ resales

prices. Subsection E prohibits, for five

years, the distribution from exercising

their Colgate rights to unilaterally

terminate dealers for failure to comply

with any minimum advertised or resale

price.

For EMI, BMG, and UNI, Parts IV, V,

and VI are various notice provisions

requiring the companies to notify their

customers and senior management

concerning the terms of this order. Part

VII establishes that the distributors shall

make annual compliance reports

concerning their compliance with the

terms of this order. Such reports may

also be required by the Commission at

any time. Part VIII establishes that the

order shall terminate in twenty (20)

years.

Part IV of the WMG and Sony orders

specifically incorporates an exception to

the prohibition against RPM that

permits distributors to require their

dealers to pass-through discounts. The

notice and compliance requirements,

and term of the order, are the same as

for the other three respondents and are

found at Parts V, VI, VII and VIII of the

orders for WMG and Sony.

Federal Register / Vol. 65, No. 96 / Wednesday, May 17, 2000 / Notices 31321

1 In American Cyanamid, the manufacturer

conditioned financial payments on its dealers’

charging a specified minimum price, which the

Commission found to be per se unlawful minimum

resale price maintenance. By contrast, financial

payments under the distributors MAP policies here

were conditioned on the price advertised, not on

the price charged.

2Commissioners Swindle and Leary have

previously stated that the Supreme Court should

reassess the applicability of the per se rule to the

practice when the appropriate case arises. Nine

West Group Inc., Dkt. No. C–3937 (Statement of

Commissioners Orson Swindle and Thomas B.

Leary). However, they agree that, so long as this per

se rule is the law, summary treatment is appropriate

for resale price agreements and other agreements

with the same practical effect.

3 In addition, the Commission will continue to

consider per se unlawful any cooperative

advertising program that is part of a resale price

maintenance scheme. Cf. The Magnavox Co., 113

F.T.C. 225,262 (1990) (‘‘Of course, any cooperative

advertising program implemented by Magnavox as

part of a resale price maintenance scheme would be

per se unlawful. * * *’’).

By direction of the Commission.

Donald S. Clark,

Secretary.

Statement of Chairman Robert Pitofsky

and Commissioners Sheila F. Anthony,

Mozelle W. Thompson, Orson Swindle,

and Thomas B. Leary

File No. 971–0070

The Commission has unanimously

found reason to believe that the

arrangements entered into by the five

distributors of prerecorded music

violate the antitrust laws in two

respects. First, when considered

together, the arrangements constitute

practices that facilitate horizontal

collusion among the distributors, in

violation of section 5 of the Federal

Trade Commission Act. Second, when

viewed individually, each distributor’s

arrangement constitutes and

unreasonable vertical restraint of trade

under the rule of reason. A discussion

of these violations is spelled out in our

Analysis to Aid Public Comments.

The Commission considered carefully

whether the anticompetitive vertical

restraint should be evaluated under a

per se rule or rule of reason. In the past,

the Commission has employed the rule

of reason to examine cooperative

advertising programs that restrict

reimbursement of the advertising of

discounts, because such programs may

be procompetitive or competitively

neutral. Statement of Policy Regarding

Price Restrictions in Cooperative

Advertising Programs—Rescission, 6

Trade Reg. Rep. (CCH) ¶ 39,057. The

cooperative advertising programs that

were the subject of previous

Commission actions involved only

advertising paid for in whole or in part

by the manufacturer, but did not

restrain the dealer from selling at a

discount or from advertising discounts

when the dealer itself paid for the

advertisement. See, e.g., The

Advertising Checking Bureau, Inc., 109

F.T.C. 146, 147 (1987) (‘‘the

restraints* * * do not prohibit retailers

from selling at discount prices or

advertising discounts or sale prices with

their own funds’’).

The Minimum Advertised Pricing

(‘‘MAP’’) policies of the five distributors

in this matter go well beyond the

cooperative advertising programs with

which the Commission has previously

dealt: The distributors’ MAP policies

prohibited retailers from advertising

discounts in all advertising, including

advertising paid for entirely by the

retailer; the MAP policies applied to instore advertising, excepting only the

smallest price labels affixed to the

product; and single violation of a

distributor’s MAP policy carried severe

financial penalties, resulting in the loss

of all MAP funds for all of the retailer’s

stores for 60 to 90 days (see Paragraph

7 of each Complaint).

Retailers were free to sell at any price,

so long as they did not advertise a

discounted price. In fact, there was

evidence that some retailers on rare

occasions did sell product at a discount

without advertising the discounted

price, instead advertising simply that

the product was available at a

‘‘guaranteed low price.’’ We are

therefore reluctant to declare that

compliance with the MAP policies by

retailers constituted per se unlawful

minimum resale price maintenance,

because we cannot say that there is

sufficient evidence of an agreement by

retailers to charge a minimum price. As

stated by a majority in In the Matter of

American Cyanamid Co., ‘‘both the

courts and the Commission have judged

cooperative advertising cases under the

rule of reason, as long as the

arrangements do not limit the dealer’s

right: (1) To discount below the

advertised price, and (2) to advertise at

any price when the dealer itself pays for

the advertisement.’’ 123 F.T.C. 1257,

1265 (1997) (Statement of Chairman

Robert Pitofsky and Commissioners

Janet D. Steiger and Christine

A.Varney).1

In Business Electronics Corp. v. Sharp

Electronics Corp., 485 U.S. 717, 735–36

(1988), the Supreme Court held that ‘‘a

vertical restraint is not illegal per se

unless sit includes some agreement on

price or price levels.’’ In our view,

Sharp requires something more than a

showing that an agreement has some

influence on price. Restrictions on

advertisements that include discounted

prices in advertisements funded in

whole or in part by the manufacturer are

not per se illegal, notwithstanding the

fact that they are likely to have an

influence on resale prices. Indeed, the

pervasive practice of publishing

suggested retail prices is also likely to

have some influence on actual prices,

but it is well established that this

practice is not per se illegal. See, e.g.,

Monsanto Co. v. Spray-Rite Serv. Corp.,

465 U.S. 752, 761 (1984).

Nonetheless, we conclude that the

distributors’ MAP policies are unlawful

under a rule of reason analysis. The five

distributors together account for over 85

percent of the market (see Paragraph 2

of each Complaint), and each has market

power in that no music retailer can

realistically choose not to carry the

music of any of the five major

distributors. The MAP policies were

adopted by each of the distributors for

the purpose of stabilizing retail prices

(see Paragraph 10 of each Complaint).

The MAP policies achieved their

purpose and effectively stabilized retail

prices with consequential effects on

wholesale prices, ending the price

competition that previously existed in

the retail marketplace and the resulting

pressure on the distributors’ margins

(id.). Compliance with the MAP

policies—which was secured through

significant financial incentives—

effectively eliminated the retailers’

ability to communicate discounts to

consumers (see Paragraph 8 of each

Complaint). Even absent an actual

agreements to refrain from discounting,

this inability to effectively communicate

discounts to consumers meant that

retailers had little incentive to actually

sell product at a discount.

In the future, the Commission will

view with great skepticism cooperative

advertising programs that effectively

eliminate the ability of dealers to sell

product at a discount. The Commission

will, of course, consider per se

unlawful 2 any arrangement between a

manufacturer and its dealers that

includes an explicit or implied

agreement on minimum price or price

levels,3 and it will henceforth consider

unlawful arrangements that have the

same practical effect of such an

agreement without a detailed market

analysis, even if adopted by a

manufacturer that lacks substantial

market power.

[FR Doc. 00–12380 Filed 5–16–00; 8:45 am]

BILLING CODE 6750–01–M