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[May 05, 2006]
Digital disconnect (Video Business Via Thomson Dialog NewsEdge)It's getting to the point where you almost feel sorry for the major record labels.
The U.S. Department of Justice, the New York State attorney general and a federal district court in California are all investigating the Big Four distributors for possible price-fixing and other anti-competitive behavior related to online music sales.
The latest blow came last week, when federal judge Marilyn Hall Patel
ruled in the never-ending Napster
case that there is sufficient evidence to conclude that the record companies intentionally misled DOJ investigators in 2001, when the department first looked into licensing and pricing practices at the label-owned MusicNet
She then ordered the companies to turn over hundreds of pages of documents concerning their internal deliberations.
At nearly the same time, however, the labels were reportedly close to throwing in the towel in their battle with Apple (
for the freedom to not have a fixed price for downloads on Apple's popular iTunes
The labels have fought to change the terms of their licensing deals with iTunes to permit them to charge more than 99 for the most popular tracks and threatened to pull their catalogs from the service if they didn't get their way.
Apple held firm, however, and with no real alternative for reaching iPod owners, the labels were apparently on the verge of capitulating last week.
It's "almost" possible to feel sorry for the labels because the bed of nails they now find themselves lying in is largely of their own making.
MusicNet and PressPlay were defensive responses to the labels' own failure to move when they should have embraced digital distribution. The services were designed to protect high-margin CD sales by preventing consumers from doing what they manifestly wanted to do: download and own individual tracks at a reasonable price.
When those efforts failed, the labels compounded their error by falling for Apple's siren song of robust copy-protection and entrusted their catalogs to a company whose business is not selling music.
The variable pricing model the labels are now belatedly seeking is antithetical to the basic purpose of iTunes, which is to provide a reliable supply of fungible "content" to fill up the iPods that are Apple's real business.
The result is the labels have lost pricing power, and with it, control over their own margins.
As the major studios begin to move into digital distribution of movies and TV shows, it remains to be seen whether they'll make any less a mess of it than their music-industry counterparts.
The recent moves by the studios to offer permanent downloads through studio-owned Movielink
could certainly make you scratch your head.
We can take it from the simultaneous announcements, I assume, that the five studios all reached the same, independent conclusion at the same time about the best way to offer their movies online.
If I were playing lawyer, however, and I knew that federal investigators were looking into whether the record labels used their joint ownership of MusicNet and PressPlay to improperly gain information on their competitors' business plans and licensing terms, I might have advised my studio clients to space their announcements out a bit.
I'd also advise them to hurry up and license their movies on the same terms to other online services.
The real question, though, is whether the studios will be any more successful than the record labels at maintaining pricing power.
By making permanent downloads available at the same time as DVDs, the studios have set up direct competition between the two delivery platforms. The likely result is that retailers in both camps will be keen to push down prices.
The challenge for the studios will be to manage that price war where they don't own the delivery platformand not to resist it where they do.
Paul Sweeting (firstname.lastname@example.org) is editor-at-large of VB.
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