Read this and win $20, music lovers

Recording industry accepts settlement to pay CD buyers

January 09, 2003|By MIKE HIMOWITZ

Every time I start to feel sorry for the recording industry because online piracy is cutting into sales of legitimate CDs, something comes along to remind me that these guys may be getting exactly what they deserve.

This time it was a news blurb about a Web site advertising the settlement of a class action lawsuit brought by the attorneys general of 43 states, who charged that the industry's five largest labels engaged in a five-year campaign to fix CD prices.

If you bought a recording from a retailer between 1995 and 2000, it's definitely worth a visit to the site at You could wind up $20 richer just by filling out a claim form.

Now, 20 bucks isn't a lot compared with how much you probably paid in inflated prices, but it's something. When you read through the legal gobbledygook, you'll also get an idea of how the record industry works - and why so many of today's online music traders believe the recording studios are fair game.

Under the terms of the settlement, the record labels and three retail music chains will distribute $67.3 million to customers who register as claimants by March 3. You don't have to prove that you bought a CD or tape while the scheme was in force - they'll take your word.

In addition, the record companies will provide $75.7 million worth of CDs to libraries, schools, nonprofit organizations and other public institutions once the settlement is approved by a federal judge in May.

The defendants are the Who's Who of the recording industry - Bertelsmann Music Group, EMI Music Distribution, Warner-Elektra-Atlantic, Sony Music Entertainment and Universal Music Group, along with MTS- /Tower Records, Trans World Entertainment and Musicland Stores.

The five big labels and their affiliated distributors control the current hits and back titles of almost every big-name recording artist.

According to filings by the attorneys general, the scheme began in the mid-1990s, when traditional record retailers (such Tower and Musicland) began feeling the competition from "big box" stores such as Circuit City, Best Buy, Target and Wal-Mart, who were selling CDs at steep discounts. During that period, the price of the average CD actually declined from $15 to as low as $10.

When the traditional record stores complained, the Big Five (abetted by the National Association of Recording Merchandisers) established remarkably similar, restrictive minimum advertised pricing policies.

Essentially, they threatened to withhold millions of dollars in promotional advertising assistance from any store (or chain) that advertised CDs below the record labels' minimum price. The threat, backed by tough enforcement, was enough to bring the big boxes into line. The retail price of CDs shot back up, even though the cost of producing them was declining. Absent competition at retail, the record labels were able to increase wholesale prices, too.

This kind of scheme is known as price fixing, and it's against the law - if anybody figures out what's going on and decides to do something about it. A group of attorneys general did just that in May 2000.

In September, the record companies agreed to settle. As usual in these lawsuits, the defendants denied any illegal conduct, but they agreed to change their marketing practices and pony up $143 million for their lack of wrongdoing.

The problem is that so far, not many consumers know about the settlement. So the attorneys general who brought the suit are trying to stir up interest.

Depending on how many people file claims, individual awards could be as high as $20. But there's a catch, as usual. If there are enough claimants to drive the individual award below $5, the overhead will be too high to send out individual checks, and all the cash will go to public institutions and charitable groups, to be used for the promotion of musical activities.

By the end of last month, there were only 30,000 takers, so absent a stampede over the next seven weeks, it's likely to be worth your time to stop by the Web site, fill out an online claim form, and check the legal documents.

They make fascinating reading, especially in light of today's continuing battle between the record companies and file traders who pass millions of illegal copies of CD tracks over the Internet every day.

While most of this trading violates U.S. copyright law, pirates have long argued that it's their only recourse against record producers and artists who routinely supply albums with only a few tracks worth listening to at outrageous prices.

The issue of quality, of course, is an artistic one. But a glance through the documents leaves little doubt that album prices were artificially inflated for years.

Thanks to the settlement - and pressure from the marketplace, CD prices have started to decline. But then, so are CD sales, a situation the industry blames solely on piracy.

There are signs that the record companies are listening to the marketplace - with half an ear, anyway. A handful of industry-backed Web sites now sell downloadable music, although copying restrictions make it unlikely that potential customers will switch from illegal trading using Kazaa and other Internet-based schemes.

Meanwhile, the labels plan to put copy protection on future CDs, and they're pushing Congress to require makers of computers and audio equipment to build copy protection into their machines. Both proposals could make it difficult or impossible for buyers to exercise their legitimate rights to make backup copies or download tunes to digital music players.

Given the conduct of the industry in the past, its war against pirates isn't likely to generate much sympathy. When watching a school of pirahnas nibble away at a killer shark, it's hard to know whom to root for.

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