Three weeks after voluntarily agreeing with the Federal Trade Commission to abandon a contentious CD pricing policy, record executives are still stewing over how the whole thing went down.
Privately, some complain the FTC double-crossed them. They accuse the FTC of holding a grandstanding press conference, and claim most reporters botched the story. Either way, the industry learned a painful P.R. lesson about the dangers of allowing your opponent to set the public agenda.
The record industry and the FTC have long been hardened enemies. Over the past decade, the FTC has spent much of its time investigating CD pricing. Its central beef: CD prices are artificially inflated.
In 1997, the FTC set its sights on MAP, the so-called "minimum advertising pricing" policy established by the record industry to make sure CDs aren't sold too cheaply at certain retail chains.
MAP came to the record industry five years ago when music retailers began complaining about the beating they were taking at the hands of aggressive mass-merchants like Circuit City and Best Buy. These companies were selling CDs at a loss in order to increase foot traffic.
With MAP in place, retailers who sold CDs below a certain minimum price were no longer eligible for crucial ad dollars that flowed from the labels; some might even have CD shipments withheld.
Looking into the legality of MAP, the FTC began gathering up label documents and e-mails, and grilling executives. "I'd have lawyers in my office for three, four hours at a time," says a V.P. of sales at one major label.
On May 10, in the interest of getting FTC lawyers out of their hair, the Big Five major labels agreed to do away with MAP.
At first, the labels were happy. They thought getting rid of MAP was the end of the story. Then the FTC trumpeted the case, promising that CD prices would quickly drop by nearly $5, a notion the press jumped on. "Prices of CDs Likely to Drop, Thanks to FTC," read the Wall Street Journal headline. "FTC settlement will bring CD prices down," proclaimed the New York Post.
Many in the industry believe that the reporters covering the story relied too heavily on FTC spin and failed to understand how MAP actually works.
In fact, the bulk of the industry's decision to drop MAP can be traced back to the merger fever of the past year.
After Sony and Time Warner announced their plans to merge Columbia House Record Club with CD Now (a deal since quashed), and Time Warner unveiled its plan to merge with AOL, the FTC took the driver's seat. Drop MAP, they told the labels, or you'll endanger these mergers.
Time Warner, anxious to grease the regulatory skids and avoid court action, was the first to bend backwards on MAP. The other four labels quickly followed. "They put so much pressure on Time Warner," says one V.P. "Otherwise none of us would have gone along with it."
In truth, the FTC's final agreement with the majors was seen as a slap on the wrist (i.e. we didn't do anything wrong, and we won't do it again).
Which is why label players were so taken aback when FTC chairman Robert Pitofsky held a press conference May 10 to announce the music industry had illegally inflated the price of CDs by using marketing schemes that violated federal antitrust laws, and that unsuspecting consumers had been overcharged by $500 million during the past four years.
Thanks to the FTC's hard work, Pitofsky said, CD prices would soon drop from between $2 and $5, saving shoppers nationwide $17 million a month.
"We couldn't believe the FTC would come out and say that," says one distribution chief. "It was total showboating. Plus, they knew we couldn't comment."
Afraid to botch the FTC deal by discussing MAP with the press, the music business ceded the P.R. ground and came out looking like a bunch of extortionists. The coverage, "was a fucking fraud," says one major label senior vice president, stunned at how news reports simply echoed the FTC's spin.
But can the FTC do what it says? If the big discounters want to once again use music as a loss leader, and sell CDs for $9.99, then prices may indeed drop. But if those chains, which now make profits on CDs, decide they like those profits, consumers shouldn't be expecting $10 CDs this summer.
Meanwhile, reporters seemed to have trouble getting their hands around the basics of MAP. Reuters, for instance, reported MAP "restrict[ed] stores from advertising discounted CDs," which was plainly incorrect. What MAP does is restrict stores from advertising CDs below a certain discounted level (roughly $1.50 to $2.20 above wholesale).
In other words, retailers bought 'N Sync's "No Strings Attached" from BMG distribution for $12.80. Under MAP they were able to advertise it for as little as $14.98 and still be eligible for label co-op dollars. If stores wanted to sell "No String Attached" for even less -- and lots of retailers did sell it for $13 -- they simply advertised they had the CD for the "lowest guaranteed price."
The New York Times made a similar mistake, telling readers "The [MAP] agreements between the music companies and the retailers forbade the retailers to advertise discounts on CDs in newspapers, on television or even on posters in the stores themselves." But just pick up any circular in a Sunday newspaper and you'll find scores of retailers advertising discounted CDs. Instead, MAP forced retailers to maintain a certain minimum price of roughly $4 below the $18 list price.
Just recently, BusinessWeek confused wholesale with retail: It wrote that major labels, wounded by the FTC agreement, would be "faced with the prospect of lower CD prices." In fact, MAP never affected the wholesale price labels sold their CDs to retailers for; even when MAP disappears, labels are going to making the exact same profits off their CDs.
Here is the only thing that may change: Profit margins for retailers may shrink even further. That simple distinction -- lost in most of the press coverage -- had more than a few record company executives scratching their heads. MAP meant nothing to their bottom line.
Not surprisingly, prompted by the FTC's strong remarks, consumers in California and New York recently filed class-action lawsuits accusing the labels of price-fixing and conspiring to "restrain, suppress and eliminate competition" in the sale of CDs.
Label executives express annoyance rather than concern over the suits; others seem bewildered by all the talk of artificially inflated CD prices and lack of retail competition, considering that mall chains, indie stores, mass merchants, online outfits and record clubs are all busy selling CDs on the cheap today.
As one Big Five V.P. pointed out, "When was the last time you paid $18.98 for a CD? Nobody can't find a new CD for between $11 and $15."