[Federal Register Volume 65, Number 96 (Wednesday, May 17, 2000)]
[Notices]
[Pages 31319-31321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-12380]


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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.

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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 3\1/2\ 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-Elektra-Atlantic 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 in-store 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

[[Page 31320]]

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.
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    \1\ BMG'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.
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    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.


[[Page 31321]]


    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) para. 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 in-store 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\
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    \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.
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    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.

    \2\ Commissioners 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. * * *'').
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[FR Doc. 00-12380 Filed 5-16-00; 8:45 am]
BILLING CODE 6750-01-M