So much for collusion.
Despite longtime complaints that major record labels work together behind the scenes to protect their marketplace monopoly, you could practically hear jaws dropping Tuesday morning as music business executives heard about Bertelsmann's historic deal with Napster. That's because they found out about it the same way everyone else did, including the Recording Industry Association of America: on the news wires.
The fact that Bertelsmann, owner of BMG Music (i.e. Dave Matthews, Christina Aguilera, etc.), would strike a deal with Napster at the same time the music giant was part of an aggressive industry lawsuit to shut the music file-swapping company down for copyright infringement, must have especially stunned and angered some major label chiefs.
Is that any way for a "cartel" to operate? "Cartel" is a favorite tag among online conspiracy theorists for the major record companies. But a cartel working in tight unison would never mix up its signals this badly -- particularly on such a sensitive and high-profile topic as Napster.
And would a cartel feature the kind of public sniping that came from Thomas Middelhoff, chairman and chief executive of Bertelsmann, at the triumphant press conference announcing the Napster alliance? "This is a call for the industry to wake up," said Middlehoff. "It is not enough to fight file-sharing in the courtroom."
Middelhoff sounded like he'd been recruited into Napster's army of attorneys. (Even more intriguingly -- no one from BMG distribution, which deals with brick-and-mortar retail on a daily basis, was part of the press conference. At a time when BMG is busy lining up retailer support for crucial fourth-quarter releases, the Napster announcement, which maps out a future in which consumers may bypass retailers completely, does not make life easy for the distribution team.)
It should also be noted that Bertelsmann's surprising move came just months after Universal Music Group also shunned the major label pack strategy when it refused to settle a copyright infringement case against MP3.com. Instead, Universal saw the case to trial. For a cartel with just five members, it seems the major labels have a tough time sticking together.
The irony is that for the pending subscription models to work, like the one BMG and Napster hope to launch in which users will pay a monthly fee, the major labels will have to team up and work in unison. In other words, they will need to find a way to (legally) collude.
Although details remain murky, the proposed BMG/Napster deal would create a new music-trading entity: Call it "Napster II." Users would pay a monthly fee and have access to BMG's catalog. And thanks to new technology, Napster II would be able to detail downloads and make sure labels and artists were paid accordingly. Once Napster II is up and running, BMG would back out of the industry lawsuit, and then be left with options to buy Napster equity.
BMG is urging the other major labels to come aboard, and that's where the problems begin. First of all, by grabbing an equity stake, BMG lowers the incentive for competitors like Sony and Warner Music Group to offer up their catalogs to Napster II. While those labels would be compensated for Napster II traffic, BMG would be the one turning a big profit if the new service really took off. Traditionally, labels have not been eager to help make their competitors rich.
At the same time BMG lines up with Napster, the other major labels are working on subscription models of their own. (And for now that's what Napster II appears to be: BMG's answer to a subscription model -- albeit one that comes with a killer brand already attached.) So in theory, consumers may soon be faced with separate major-label subscription plans. Each would be looking for a monthly fee from users, and each would feature only a proprietary music catalog.
In other words, for Madonna music files, users would have to subscribe to the Warner plan; for Limp Bizkit, users would have to subscribe to the Universal plan; and so on. (Sony and Universal have announced plans for a joint subscription service, but it would still offer just two of the five major-label catalogs.)
So not only in a post-Napster world would users suddenly have to pay for access to online music, but the library they'd be choosing from would be greatly restricted, drawn along major-label catalog lines.
"The problem is if you turn on a service and offer just a portion of the music," explains Nitsan Hargile, senior Internet analyst for Kaufman Brothers. "That's not a realistic expectation by any means because music is the same for us, we don't know or care if it's BMG or Sony. We just expect all the music to be offered."
Which brings us back to collusion. From a user's perspective, if monthly subscription fees become a necessary evil, the best solution would be for one centralized online outlet (Napster II?) to legally offer all the major label catalogs. That way, consumers wouldn't have to jump from service to service looking for their favorite acts. But in order for that to happen, all the major labels would have to come together and work out licensing deals and tackle the thorny issue of pricing.
But considering that the Federal Trade Commission just finished investigating record labels for setting artificially high CD prices through their minimum advertised pricing policy, the question for now is this: Will record companies want to open themselves up to price-fixing complaints again?