**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 for 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 the 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 most aggressive 
      retail competitors would stop advertising prices below MAP. The complaints 
      further allege 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, had 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 distributors 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 
      "efficiencies") 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 in 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 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 their 
      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 representatives 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 retailers' promotional costs to ensure compliance 
      with any MAP program. Subsection D prohibits the distributors from 
      controlling their customers' resale prices. Subsection E prohibits, for 
      five years, the distributors 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 VII of the orders for 
      WMG and Sony.
      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.