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Investigation into Online Music Price Fixing?

I have a funny feeling the recording industry is actually behind this investigation. Isn't it the recording industry that is pissed off Apple won't let them charge more for "major hits"? My assumption is the recording industry sees this investigation as a "good thing" so they can break Apple's pricing structure. As many others have pointed out, the problem is the recording industry wants both "any" price and a "minimum" price.

Both 'Analog Kid' and 'wrylachlan' have great posts about a free market. However, neither talked about the used market aspect of price balancing. The used market helps balance the price over time -- how much is a hardbound book worth once the paperback comes out? As we're starting to see in the game market, companies are starting to complain cause they can't charge $60 for a crappy game anymore because someone can just buy it used for half the price. The previous DOJ investigations against price fixing in the game industry (particually Nintendo) did nothing to "free up" game prices. Now that used game consumers aren't labeled as "criminals", game prices are starting to self balance.

My hope would be that the DOJ would realize during this investigation that the current DRM system is flawed. After I purchase a song from iTunes, I should be able to resell my license to someone else after I get bored with it. This would help stabilize pricing over time. Of course the RIAA wants a cut of the profits for every transaction regardless of ownership.

The chances of the DOJ actually doing something about this???????? Ya, right.
 
Microecon 101

My graduate degree is forcing me to retake an introductory course in microeconomics, and since we have just finished up two weeks on monopoly, I thought I would share some simple insights from the text...

First thing's first: Did anyone happen to read the title of the attached MSNBC news article? It is "Feds query labels about online music prices." The only Apple music label that I recall is Apple Records. If the feds are sending subpoenas to music labels for information, why are people freaking out that this investigation will hurt Apple? The point of the article is that the DOJ are worried about price fixing amongst the record labels.

Here are some points from my textbook, Pindyck and Rubenfeld's "Microeconomics, 6th Ed.," that back this up:

"Section I of the Sherman Act [the act that governs anti-trust law] (which was passed in 1890) prohibits contracts, combinations, or conspiracies in restraint of trade. One obvious example of an illegal combination is an explicit agreement among producers to restrict their outputs and/or 'fix' price above the competitive level."

Collusion amongst the record labels to increase their wholesale music prices to Apple and other online vendors or to force Apple via new contractual stipulations to raise prices for more popular songs is what the DOJ is most likely investigating. That this collusion is taking place is entirely possible given that their are few record companies and that they all work together closely at the RIAA to protect everything from patents to any technological innovations that are a threat to their business models. Even if there is no evidence that they directly colluded, e.g., industry executives got together in a dark smoky room and agreed to the contractual terms that they would offer apple (as was mentioned earlier), they could be found in violation of the Sherman Act for demonstrating parallel conduct, or simply that their behavior implies that they colluded.

Any indictments for collusion could be devastating to the companies and individuals involved. The Sherman Act grants anyone hurt by an anti-trust violation the opportunity to sue for treble damages (3x the amount of actual damages) and evidence of direct collusion between executives, e.g., emails, wire-tapped conversations (thank you Bush?), etc., could lead to jail time for individuals involved.

If Apple had anything to do with inciting this investigation, it not only serves a warning shot across the bow of the movie studios of the MPAA, with who they are in likely negotiations over the upcoming iTunes Video Store (fingers crossed), but a much needed check on the power of the current oligopoly of recording studios.

For those of you who still think this is targed at apple...

The Clayton Act of 1914 will give you anxious folks something to chew on. This act, which further defines Section 2 of the Sherman Act that deals with monopolies (thank you Pindyck and Rubenfeld), makes it illegal for firms to engage in predatory pricing. In laymen's terms, this would make it illegal for Apple to stipulate in its contracts with the record companies that the music labels would not allow for any other online merchants to sell their songs. IMHO, nothing I have seen in the media indicates that Apple is anywhere near that powerful a vendor in the marketplace; in fact, this article implies the opposite.

Anyway, I hope this post helps ease any concerns about potential damage to Apple. In any event, if charges are brought against the music labels, the trials will make for great entertainment. :)
 
It's not pointed at Apple. These sorts of things are all too common occurances, especially in the music industry. With the massive consolidation of the music labels (never mind the fact that D.C. politicians are totally bored with the "War On Terror" and need something to garner public approval) there were sure to be investigations of this type.

On a related note, I think Steve and his buddies should not have caved in to the music industry and allowed the flexible pricing. If they wanted to pull their labels, let them. The music industry is changing and the labels are yesterdays news. Let them go the way of Compaq.
 
sbbruiser said:
Collusion amongst the record labels to increase their wholesale music prices to Apple and other online vendors or to force Apple via new contractual stipulations to raise prices for more popular songs is what the DOJ is most likely investigating.
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No duh. Apple is the victim here:)
 
In the future, every band will have a paypal account, and every song will have a little verbal advertisement at beginning and middle and end saying "If you like what you're hearing, why don't you go ahead and donate a couple bucks to Jimmy, Dan, Lance and Lucy, feed our kids and buy us our beer?" -- which ad will be disabled after you've choked up your nickle or quarter or dime.

It's not unfortunate so much as full of strife, the contention between the ways of money and that of art. From an artist's perspective, I need to eat and would like to devote myself full time to my chosen profession, but I've accepted the fact that I am NOT chasing big bucks, by attempting to make beautiful and worthwhile things....

Money and art are not mutually exclusive, but they concern two very different things. Or do they? Being a businessman is just as much an art as being a musician -- and both must make the choice to balance their need to please their self with their need to please others.

But once someone loses sight of the fact that they are essentially providing a service, that they are a servant of their audience or customers, then they're doomed to failure. Morally and financially. Though it might take a while for the financial stuff to catch up with them.

And while I agree with Analog Kid, that the *tone* shift of the P2P revolution / evolution feels more an act of civil disobedience than just theft, I wish I could redeem my guilt with a few bucks tossed directly to the creator of the art that I partake of, and not the persons who've more or less engineered the art's getting to me, though they surely deserve what's coming to them.
 
MacNut said:
The same should go for normal CD's too, why should I pay $19 for one CD and $12 for another with the same amount of songs.
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A perspective...
Malcom McLaren: Without the mafia and organised crime, rock and roll would never have happened.

This is the guy who created the sex pistols and "punk" music as we know it. (at least in the popular sense of it)

my point is, there is still a substantial market for the physical record.
I myself only download (iTunes or emusic) music that I cannot find physically or have no need for the album cover (ie: ridiculous pop song for friends amusement.)
If I like a band or musician, I buy the album. You get to hold it in your hands. look at all the art-work and talent that it took to make it...

If you download some album there is a kind of disassociation with what the album 'really was'.
You don't get the hand-crafted artwork, the 'sweat and tears'....

SUPPORT ARTISTS NOT COMPANIES!!!
 
wrylachlan said:
Wow, some of you people need to take an economics course in the worst way. The price a vendor sets for an item is related to demand, not cost. It doesn't matter one bit what it costs to make a CD. The price is whatever price will net the greatest profit.

(bla bla bla)

This isn't greed, its basic market economics at work. If something is more expensive than you're willing to pay, don't buy it. Simple.

A Most of this is because for every successful act, there are ten acts that don't make back the money that record companies put into them. And for the ones that do make it, the record companies play a large role in making it happen.
(edit bla bla bla filler)

Who do you think pays upfront for studio time? The band? Hell no. Who pays the marketers who work to get the songs into radio station rotations and MTV?
If there's anyone to blame for the state of music today its consumers who choose, time and again, Britney Spears and Co. over quality musicians.
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ok lets tackle the last bit first. The public does not choose britaney spears and co. MARKETing execs choose her and force it into the media. You forget that she and her equals were all disney employees so for the label she was a sure bet for income.

Labels payfor/produce/promote bands its true... . which makes them loan sharks with lawyers for leg breakers. that however is off topic

fixed pricing is a good idea. let the market decide the fate of musicians instead of marketers. the pie servings are between the labels and artist. Apple is just a retailer and is an incredibly successful music seller. the winners are the indie artists that get more of a share of that pie.

price fixing is a bad idea because it gives the labels the opportunity to basically steal more money from artists and customers by unreasonably raising the price of media that has momentum draining resources of the consumer who may want to buy something from a not so popular artists. causing retailers to lose even mor because they usually set sale prices on top 40 artists lowering the margin to near or below cost.

oh god i am tired and going bed..
 
BlackLilyNinja said:
MARKETing execs choose her and force it into the media.
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Marketing teams create demand or strategically inform the end users how the product fill their needs. There have been a few bad apples along the way but in general nobody is forcing anything into the media (that would be illegal).
fixed pricing is a good idea.
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That would be illegal.
let the market decide the fate of musicians
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They do. There have been many failed attempts to do as you say by big labels and small.
Apple is just a retailer and is an incredibly successful music seller.
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Music retail is not a money making business in the big scope of things. The list of "incredibly successful music" sellers that have dimminished or completely disappeared in the recent past is a sad record of that.
the winners are the indie artists that get more of a share of that pie.
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Bands make these choices on their own or with some sort of guidance. They have the opportunity to go with indie labels or self promote. They negotiate their contracts. You play with the big boys. You're gonna pay the price.
causing retailers to lose even mor because they usually set sale prices on top 40 artists lowering the margin to near or below cost.
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There are incentives (advertising money, lower costs, exclusive songs or albums, in-store performances and appearances [you don't think these bands are just showing up at the Apple events do you?], etc) for retailers to buy the product in. It's not a fixed price when there are negotiations. The buyers job is to get the best deal, as is the label reps.
 
Bargin Bin Music CDs at a premium price!?!?

Why should I pay $10 a CD from Apple when I can get that same CD at Target, Walmart or even Walgreens for $5.

Some of the stuff I've wanted to buy from Apple was vastly overpriced. I listen to a lot of old stuff and i just doesn't make sense to pay premium prices for stuff that is selling at department stores for half the price..

That being said, I do buy some of it because its harder to find and I'm not up too traveling to three or four stores looking for that one oldies CD.

Christopher

p.s. I'd much rather pay $0.50 for stuff that's really old/not popular.
 
A little history

The labels were just (well, a couple of years ago) convicted of price-fixing. Anybody else sign on to the class action? I got a check for about $10, I seem to recall. Whatever other weaselly, knee-breaking idiot gangsters the labels are, they continually try to fix the market, and it's not to benefit the artists. The inquiry they really are, and should be, scared of, is the new payola scandal brewing. You know what you hear on the radio? The labels pay for it. They decide what the hits are going to be, and they pay to play the hell out of it. If you notice, radio is no longer the factor it once was in our culture. It took a lot of money to suck the life out of it.

What the labels hate about iTunes is that they've given up the pricing decisions to Steve Jobs, and he wants a simple, clear, one-price-fits-all policy.

These inquiries will come to nothing, though, just like the class action suit I got a tiny share of. For all you free-marketers out there, there's one single restraint of trade factor that's limiting the market's power, and that's DRM. That's why Apple may eventually face a monopoly charge, why there's no real competition to the first provider with the best player, why the price of the individual unit (song) isn't coming DOWN to what its natural level would be if the competition was to give the consumer what he wants, in the most convenient, best-sounding package.

The old marketing paradigm force-feeds the consumer, creating the style and then letting the consumer choose from a limited catalogue. Think Record-of-the-Month Club. Think of the old DJs grinding out Top 40 radio. Only in larger cities were the record stores big enough that you could get old, rare music, or foreign imports and the like. Now you can get everything.

If there wasn't the artificial restraint of trade of DRM, the price per unit would drop, maybe to as low as five cents a track. What is the point where instant access to a guaranteed copy of the master, of any of the world's music, would be much more fun than poking around on the pirate boards?

It's time to remember that the customer and the artists are the center of the business, not the overpaid execs.
 
Does price-fixing encourage illegal file-sharing?

Will the record company execs be fined 100s of 1000s of dollars and go to jail, like the people sued by the RIAA?

No, I didn't think so.
 
ChrisG said:
Why bother downloading from iTMS? Just get Limewire...
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Different strokes for different folks. Some people find value in music and are willing to pay for it accordingly. Other people see no value in music, or just want everything for free. Other people simply prefer to engage in illegal activities and commit theft. :cool:
 
cgmpowers said:
Why should I pay $10 a CD from Apple when I can get that same CD at Target, Walmart or even Walgreens for $5.
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The labels set the price for albums. Some places discount the older stuff. Apple sells some albums for $10, but others for as high as $20, but it's not up to them. Some of the more popular albums out there are $17.99 no matter where you go, so sometimes it's cheaper. If the labels get their way, you won't be paying less for some and more for others. $1 would be the bargin bin, and probably just be songs you could get on compilation CDs that go for $5 at the carwash.

But again, this is not the issue. Apple is the victim, not the ones under investigation. READ THE ARTICLE PEOPLE!
 
wrylachlan said:
hammers are essentially interchangeable.

Music is not. People aren't going to go out and buy more Santana because the Jessica Simpson album is too expensive. They're simply going to buy less Jessica Simpson. And production isn't something anyone can do. If I saw Jessica Simpson was overcharging, I couldn't just go out and pull someone off the street into a recording studio. It takes time.
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Music is that kind of market-- few markets are not... Substitution is common in any good, luxury or basic (witness the folks who buy Dell because Macs are "too expensive"). Comparing Santana and Jessica Simpson is drawing from two extremes. It's entirely possible that someone might pick up the Allman Brothers rather than Santana or Spears instead of Simpson. A lot of music is purchased as gifts, where the buyer isn't married to one specific artist and often don't know much more than "this is what kids listen to today".

Besides, most of the music that is being promoted today is completely interchangeable to my ears... Artists as well. It's not hard to find a cute 18 year old, take a sexy picture and put a microphone in her face. When you're marketing to a 12 year old it's not about talent, it's about image and finding an image that parents will dislike but not outright ban.

However I was responding specifically to the idea that high prices are evidence of price fixing, which is not the case. There can and often will be high prices on items even without price fixing so you can't simply point at the pricing as proof of price fixing.
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High prices aren't proof of price fixing. High prices, matched by all "competitors" in the market that are significantly above the cost of production, and by an industry that works very closely together and has been found guilty in the past, however, is worth investigation. I think that's what we're seeing here. Are they engaging in price fixing? Don't know. Investigation has just started...

My response though mostly stemmed from your comment that "cost doesn't matter one bit". In fact, it does. On one hand you're saying that CDs cost nothing to make, on the other you're saying artists don't do it themselves because they don't have the money and must rely on the labels.

There are two kinds of costs-- the cost of production and distribution and the cost of sales and marketing. There's not much that can be done about production and distribution costs aside from technology developments (enter iTMS) or cutting payments to artists. The ROI (Return on Investment) analysis here is pretty straight forward-- if we invest in updated production equipment, what is the return measured in lower costs. Sales and marketing costs are where more nebulous discussions of ROI come in-- if a company invests $x in marketing, what will be the return in the form of sales? Increasingly there is a third cost-- legal and lobbying costs which have a similar ROI analysis.

But the cost of putting out a hit CD (the ones whose high pricing everyone is complaining about) is much lower than the pricing, so it can effectively be ignored in the context of what we're discussing.
...
[earlier post] Who do you think pays upfront for studio time? The band? Hell no. Who pays the marketers who work to get the songs into radio station rotations and MTV?
...
For the specific high priced CDs we're talking about they don't even come near to selling for a loss, so that isn't applicable to our context.
...
[earlier post] Most of this is because for every successful act, there are ten acts that don't make back the money that record companies put into them.
...
The physical cost of printing and distributing the media has been going down ever since the drum phonograph. Do you honestly think that a significant percentage of a record company's budget goes to printing CDs???
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If they're not coming close to selling at a loss, then how are they not making back their money? Fact is that while the nickel in plastic that goes into the physical CD is small, the artwork, case, warehousing, shipping, order management and cost of unsold goods and returned merchandise adds up. None of this is present in the iTMS model. There's also increased efficiency in being able sell songs individually-- people may pay a buck for one song where they wouldn't put down 20 for that same song on an album (that of course cuts the other way as well-- people may have paid 20 for 5 songs in the past where they'll only spend 5 now).

Time Warner is a massive conglomerate that includes all sorts of different media. If you want a better comparison look at Warner Music Group which certainly does NOT have better numbers than Apple - by a long shot.
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You're comparing a music label and a computer hardware company which is a tenuous comparison at best. I tried to be a little more fair by comparing the larger entity on the assumption that while a particular unit may not be terribly profitable in itself, it may serve to improve the profits of the larger corporation. This is what they mean when they talk about synergy, and it's what the ROI analysis you mentioned is meant for. While Apple may not make much on iTMS, it serves to sell iPods. While Warner Music may not make much, it presumably improves the performance of their other businesses either through direct benefit, cross promoting, or what have you.

The other reason to look at the larger corporation is that large conglomerates tend to shift money around internally. The movie industry does this frequently. Jackson is suing New Line because they were assigning profits associated with LOTR to other units internally and he wasn't getting his percentage of those profits. It happens elsewhere too-- during the rolling blackouts debacle, Pacific Gas and Electric was complaining that if California didn't let them raise their rates they were going to go out of business but it turns out they were transferring billions to their parent company. If the labels want sympathy from the public and congress about the damage the internet is doing, then sucking all of the money out of their record units would help to make the case. Not saying they are, but it is common practice.
 
I apologize for the long rants, and if I'm getting further off topic (price fixing)... New stories seem a bit slow right now, there's not much we can say directly on topic since the investigation has barely started and, well, I'm having a hard time controlling myself...

[Analog Kid] If I try to take your point on ROI, however, one has to wonder... Return on Investment is a measure used to decide where to put scarce resources.

[wrylachlan] But the resources are scarce. The resource is talent. The cost of finding and nurturing, acquiring from other labels, etc. new talent must be paid by the sales of music. This "new market realities" idea is bunk.
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ROI is a way for a company to figure out where to put their resources-- namely money, time and effort. Talent is the artist's resource and they need to do their own analysis.

If it's not profitable, and it's not supporting other businesses in the same company, then it should be jettisoned. Again, it's about the ROI-- if Time Warner could make a better return selling food processors, they have no business selling music.

As far as new market realities being bunk, I think you're closing your eyes to the current state of things... There are a number of major changes happening right now that have all been triggered by a significant change in technology, which is why most economy books point to technology being the primary cause of movement in the supply and demand curves that set the market price.

For one, the whole distribution chain has been disrupted. Amazon is now among the leading music sellers, and download services such as iTMS are on the rise. That brings the production/distribution costs down significantly and downloads starts to drive them to zero. I'd call that a new market reality.

Another is globalization. First, this reduces the cost of producing music by shaping atoms, but it also has a huge impact on distributing music by bits. Suddenly the country specific licensing deals make much less sense. Your market is no longer just the country of origin which means you could presumably sell much more. You also have new music coming from all around the world, often from countries that would be happy to sell their product more cheaply. Imagine the competition when you can hear the latest rap out of Belarus, jazz from Japan and dance from Kenya... You also have unique laws in various countries that result in the likes of AllOfMP3. New market realities.

You have other new sources of competition, namely the black and grey markets and P2Ps. Legal or not, technology has made it easier for these rogues to operate and they are definitely competition. Enforcement may curb their operation, or drive their cost and risk high enough that fewer people pursue this route, but they'll continue to exist as long as there's a chance at making money. This dovetails with globalization in the fact that the biggest sources of these discs are foreign countries that have little motivation to protect American music labels. New market reality.

Customers expect to obtain their music in new ways. The internet has given them instant gratification on just about everything else from communication to information to paying their bills, to sharing vacation pictures. They want to be able to get what they want, when they want it. They buy on Amazon and ship by Fed Ex, or they go and download a song when the tune is stuck in their heads. Impulse buys are replacing trips to the record store. New market reality.

Customers expect to be able to use their music in new ways, or to extend their ability to use it in the old ways. You have music players that can carry your entire library of music many times over and they're begging to be filled. They want to be able to move their music from place to place with digital ease. They want to share it with friends the way they used to share CDs and tapes. Evolving market reality.

All of this results in expectations of lower prices by consumers. If they are buying 30GB of music, they think that should be cheaper per song than buying that many CDs. They think bits on a hard drive should be cheaper than something they can hold in their hands. New market reality.

To deal with this, record companies need to change their business model. They've been slow to do so up 'til now and they've been punished for it. They need to bring their costs down and their volumes up-- some of this is handled by the technology, as I've said, but some of it is going to require reducing their marketing costs or assigning them more wisely. Focus on the impulse buyer, for example. They need to stop whining about how they need a cut of everyone else's pie, and they need to stop making their customers hate them.
 
Ok, I think I've exhausted myself with this one. Apologies again to all, and I'll try to keep it short from here on...

wrylachlan said:
LOL. If you think that civil disobedience is anything more than a psychological trick that music theives use on themselves to assuage guilt, you're nuts. They don't do it out of civil disobedience. They do it because its easy. iTunes hasn't succeeded because because its legal. It succeeded because its legal AND easy.
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When I see people wearing T-shirts with the DeCSS code on it to stymie the DMCA, or bumper stickers saying "I steal music on the Internet", I tend to believe that this is an act of defiance for a growing number of people. It's become political. More importantly, it's seen that way by others. People are cheering it on.

Yeah, there are a lot of people out there who take the music because it's free and easy. No doubt about it-- but I still think the general tenor is changing. When Napster first broke, everyone jumped on it for the novelty-- and it demonstrated to the industry that people wanted online access. Then there seemed to be a collective change in attitude as people thought about it, and as the record companies went on line and gave them the ease of use they wanted. Now the RIAA is suing old ladies and Sony is installing root kits and people are pissed again.

I've never gotten into the download thing much, but when the RIAA says that listening to a song I bought legally on my iPod isn't fair use it does give you pause. If you don't exercise your rights, you lose them, and if they do succeed in locking down CDs so I can't use the same music in my car and on my iPod I'm almost certain to try and find a cracked copy without guilt.
 
Feh

Apple isn't even mentioned in the original article.
There's nothing to talk about until there's something to talk about.
 
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