This study examines one part of the industry’s response to these challenges, online music joint
ventures. Two major online joint ventures owned by the recording industry are currently in operation,
2
Pressplay and MusicNet. The study begins with a description of music distribution channels, both in
physical space and on the Internet. The study then discusses the competitive concerns raised by the
joint ventures. The study concludes with an assessment of the potential policy responses.
The study’s major conclusions follow:
• The online environment is sufficiently distinguishable from the physical that it requires
separate legal and policy analysis.
• Distribution platform competition is under-appreciated and is an important engine of
innovation in the online environment.
• Access to music inputs is critical to competition in the delivery of online music,
particularly with regard to platform competition.
• Joint ownership of online interactive subscription music services by the major music
companies provides these companies with a strong incentive to disadvantage their
competitors attempting to compete in this market.
• It would be preferable as a matter of public policy (at least for a limited period of time)
to require the five major record companies to divest their ownership in the two jointly
owned online interactive music subscription distribution services.
3
I. Prerecorded Music Distribution
Sales of prerecorded music are substantial. In 2001, for example, the total value of
prerecorded music sales was $13.7 billion. This is about 4 percent less than in 2000, but virtually the
same as sales for 1998.1
1See The Recording Industry Ass’n of America, 2001 Yearend Statistics, available at
http://www.riaa.com/pdf/2001yearendmanufacturersshipmentandvaluereport.pdf. Data for the first six months of 2002 show a 10.1% decline in the number of units shipped and a 6.7% decline in dollar sales. See The Recording Industry Ass’n of America, 2002 RIAA Mid-year Statistics, available at http://www.riaa.com/pdf/2002midyrchart.pdf.
4
There are five major companies (often referred to as “distributors”) that manufacture
prerecorded music under “labels” that they own. These five companies accounted for approximately
83 percent of U.S. album sales in 2001.2 The five companies are Universal Music Group (“UMG”),
with 26.4% of sales,3 Warner-Elektra-Atlantic Corporation, with 15.9%,4 Sony Music Entertainment,
with 15.7%,5 BMG Music, with 14.7%,6 and EMI Music Distribution, with 10.6%.7 Warner was
traditionally the market leader until UMG’s 1998 acquisition of Polygram, which had been the sixth
major distributor. Four of the five major distributors are owned by larger companies, each with
substantial media and entertainment interests (respectively, Vivendi, AOL/Time-Warner, Bertelsmann,
and Sony); Warner’s proposed joint venture with the unaffiliated EMI was abandoned by Warner after
antitrust opposition from the European Commission. Under the U.S. Department of Justice Merger
Guidelines, the industry would be viewed as moderately to highly concentrated.8
2The data are compiled by SoundScan as reported in Billboard, Jan. 26, 2002.
3UMG’s labels include A&M, Def Jam, Geffen, Island, MCA, Motown, Polydor, Universal and Verve.
4Warner’s labels include Warner Brothers Records Inc., Atlantic Recording Corporation, Rhino Entertainment Company and Elektra Entertainment Group, Inc.
5Sony’s labels include Columbia, Epic, WORK Group, C2, Nashville, Sony Classical, and Sony Wonder.
6BMG’s labels include RCA, Arista, BMG Classics, Windham Hill and Bad Boy Entertainment.
7EMI’s labels include Capitol, Capitol Nashville, Blue Note, Angel Records and EMI Latin.
8If the “independents” are considered as a single firm, the HHI is 1803; otherwise the HHI would be approximately 1600. The Department of Justice considers a market with an HHI above 1800 as “highly concentrated”; markets between 1000 and 1800 are considered “moderately concentrated.” See United States Department of Justice, Horizontal Merger Guidelines § 1.5.
5
The five major distributors are vertically integrated through manufacturing and wholesaling.
Through their “labels” these companies contract with recording artists to record music. The labels
oversee production of the recording and develop promotional plans; the distribution companies handle
wholesale distribution and engage in various, often extensive, promotional efforts. These promotional
efforts include securing television appearances for the artists, radio play for the music, and the payment
of (sometimes extensive) fees to retail outlets to promote the records.
Retail distribution is done through a variety of channels. The three main channels are
“traditional” retailers that specialize in the sale of prerecorded music (such as Tower Records), general
merchandise discount retailers that do not specialize (such as Walmart), and electronics discounters
(such as Best Buy). Retail distribution is also done through record clubs, which distribute their records
by mail order; some of the major distributors have ownership interest in these clubs (for example,
Columbia House, the largest club, is jointly owned by Sony and Time-Warner). Retailers generally sell
all or most genres of prerecorded music and do not limit their sales to music sold by any one particular
distributor or recorded on any particular label.
The growth and spread of the Internet has expanded retail distribution channels. Internet
distribution offers some obvious efficiencies in comparison with traditional “brick and mortar” retail
distribution (centralized inventorying, no retail stores, fewer personnel). To take advantage of these
efficiencies new retailers, such as Amazon and CDnow, began selling prerecorded music on the
Internet; this led traditional music retailers (such as Tower) to start their own Internet sales sites. These
Internet sites, however, still sold the same product as is sold through physical stores, which then needed
to be physically delivered to consumers by mail.
6
More importantly, the Internet has also provided the platform for the distribution of prerecorded
music in a form that is substantially different from music sold in physical stores, or even through Internet
retail sites. Prerecorded music in digital format can readily be transmitted via the Internet (and
subsequently listened to, stored, and replayed) divorced from the physical medium in which it was
originally embodied. Freed from the need for distribution of the original physical medium, the original
prerecorded package can also be untied and the music distributed in different combinations (most
obviously, by single songs). The channels for this type of prerecorded music distribution bear more
resemblance to applications program software than they do to physical stores (their operations, for
example, rely on critical software technologies for file compression and transmission). To distinguish
these channels from physical stores and Internet sales sites they can be referred to as “distribution
platforms.”
There are now three somewhat different distribution platforms on the Internet: file-sharing
services, webcasters, and interactive subscription services. File-sharing services allow consumers to
use the Internet to search for digital music files stored on other users' computers and to transfer
(download and upload) exact copies of the contents of other users' files from one computer to another
via the Internet. Users save downloaded files on their own hard drives for later play and can “burn”
them to blank CDs or MP3 portable players. Webcasters (“Internet radio”) transmit a stream of music
to consumers via the Internet. These services allow consumers to choose from an array of formats that
is much larger than available on over-the-air radio, but music cannot be downloaded and replayed.
Interactive subscription services offer varying combinations of streams of music, downloading, and
burning.
7
The development of these three Internet distribution platforms has been significantly shaped by
the legal environment. File-sharing services became intensely popular with the spread of Napster, which
provided a centralized directory of files for downloading. Millions of consumers used this service,
attracted, no doubt, by the fact that it was offered without charge. The five major record companies
responded to Napster by successfully pursuing copyright infringement litigation, forcing Napster to
cease operations.9 The industry has similarly pursued litigation against other free file-sharing services,
although some of these services continue to operate (at least for now).10
9The leading case is A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001)
(affirming grant of preliminary injunction against Napster for contributory copyright infringement). See also UMG Recordings, Inc. v. MP3.com, Inc., 92 F. Supp. 2d 349 (S.D.N.Y. 2000) (defendant’s service, allowing consumer-owners of CDs to access via the Internet copies of musical compositions recorded on those CDs, violated copyright laws where the actual stored and transmitted copies were made by defendant without authorization from copyright owners).
10See, e.g., Arista Records Inc. v. MP3Board Inc., 2002 U.S. Dist. LEXIS 16165 (S.D.N.Y. 2002) (suit seeking to enjoin operation of Web site that permits users to search the Internet for MP3 files; denying motions for summary judgment).
8
Webcasting has also been shaped by copyright law. By virtue of statutes enacted in 1995 and
1998 copyright owners have been given the exclusive right to control “digital audio transmissions” of
their “sound recordings” (musical compositions fixed on a CD or other tangible medium).11 These
statutes, however, also required copyright owners to license the performance of those sound recordings
to providers of “noninteractive” digital transmission services, whether those services were offered on a
subscription or a nonsubscription basis. In establishing this compulsory license for noninteractive
services, Congress made an effort to distinguish between Internet music services that more closely
resemble radio broadcasting and services that give users the freedom to select the music they want to
receive (sometimes called “on demand” services).12
Interactive subscription services are today defined more by what they are not than by what they
are. With the industry’s decision to shut down free file-sharing services, and the legislative fencing-in of
“non-interactive” Internet music offerings, the recording industry has been trying to provide a product
that meets consumer demand for on-line music without undercutting its sales of prerecorded music in
physical form. Although there are presently three broad components of these interactive services
(streaming music, downloading, and burning), no standard package has yet emerged. Indeed,
11The statutes are the Digital Performance Right in Sound Recordings Act, Public Law 104-39,
and the Digital Millennium Copyright Act of 1998, Public Law 105-304, codified at 17 U.S.C. § 114.
12See 17 USC § 114 (j) (defining an “interactive service” as one that “enables a member of the public to receive a transmission of a program specially created for the recipient, or on request, a transmission of a particular sound recording, whether or not as part of a program, which is selected by or on behalf of the recipient”). The statute places further restrictions on what webcasters operating under the compulsory license can do, including restrictions on the selections of sound recordings being transmitted (the “sound recording complement”) and on the type of programming information provided. See 17 USC § 114 (d)(2)(C).
9
technological developments are likely to cause further refinements in what such services might provide
(for example, technology that limits the number of uses of downloaded files, or that limits the ability of
owners of CDs to download music to their computers or burn the music to blank CDs).
There are today three main competitors in the interactive music subscription market. One of
them, Listen.com, is independently owned. Operating under copyright licenses from all five major
companies, its “Rhapsody” service now claims to offer more than 200,000 songs.13 The other two are
joint ventures owned by the five major record companies.14 One, Pressplay, is owned by UMG and
Sony, the first and third largest sellers of prerecorded music in physical form, with approximately 42
percent of that market. The other, MusicNet, is 60 percent-owned by Warner, BMG, and EMI, the
13See Jefferson Graham, Pay-for-play music services mimic Napster, The Journal News,
Aug. 12, 2002, at 4D; John Borland, Listen.com lands last Big Five label, CNET News.com, July 1, 2002, available at http://news.com.com/2100-1023-940841.html?tag=bplst.
14The music companies also have some separate ventures. In 2001 EMusic, an MP3 subscription service, was acquired by Vivendi, the parent of UMG; it now offers some UMG back catalogue for downloading. See Graham, supra note 13. Vivendi also owns MP3.com. Bertelsmann attempted to acquire the assets of Napster, but the acquisition was not approved by the bankruptcy court.
10
second, fourth, and fifth largest sellers of prerecorded music in physical form, with approximately 41
percent of that market.15 Both of these services are distributed on various Internet “networks,”
Pressplay through several distribution networks and MusicNet through RealNetworks. The content and
price structure of these two services differ (and have changed since the services were launched). So
far, however, the consumer response to Pressplay and MusicNet has been “tepid.”16
15RealNetworks owns approximately 40 percent of the MusicNet venture.
16See John Borland, Pressplay to offer unlimited downloads, CNET News.com, July 31, 2002, available at http://news.com.com/2100-1023-947507.html?tag=fd_lede. The two joint ventures were reported to have only about 100,000 subscribers. See Graham, supra note 13.
II. Competitive Analysis
A. Relevant Market
Markets are defined on the basis of substitutability by consumers and producers. That is,
markets are made up of a set of products that consumers believe to be reasonably good substitutes in
use and that producers of other, even of slightly different, products cannot readily make. Whether
consumers or producers are likely to make substitutions can often be determined by the extent to which
sellers of a set of products could raise price by a small amount and not loose so many customers, or
attract so many sellers of close substitutes into producing the product, that the price rise would be
unprofitable.
11
Prerecorded music can, of course, be listened to (“consumed”) in a variety of ways. Although
the music is all the same no matter how it is listened to, each channel of distribution provides the buyer
with a somewhat different product. Music delivered in physical form has different characteristics than
music that is broadcast over the air, although users certainly switch between the two. Similarly, music
that is delivered digitally over the Internet has different characteristics than music delivered embodied in
a physical medium. Each of these types of music is priced and packaged differently, offering the
consumer a different complement of product characteristics.
Prerecorded music delivered digitally over the Internet is sold through three different types of
platforms--file-sharing services, webcasters, and online interactive subscription services. Copyright law
keeps webcasting and “interactive” services separate by product characteristics. Consumers who want
interactive online music can only choose between file sharing services and interactive subscription
services.
What would happen if the sellers of online interactive subscription services raised their price by
some small amount?17 Although there are no publicly available data for applying this test, sellers of
subscription services are now able to price their product positively without losing all their customers to
zero-priced file-sharing services, several of which are still in operation. This is some indication of
separate consumer demand for a legal subscription service. It is also unlikely that producers of close
substitutes could readily enter the interactive subscription service market. Napster’s inability to do so is
good evidence of this. Its technology was closest to providing this service, but it was unable to
17For mergers, the U.S. Department of Justice generally applies a test of 5 percent lasting for
the foreseeable future. See U.S. Department of Justice, Merger Guidelines § 1.11.
12
negotiate licenses with the record companies, or strike a deal with Bertelsmann, which would have
enabled it to offer on demand music lawfully. Thus, for consumers who want legal access to digital
prerecorded music, chosen and delivered on demand, interactive Internet subscription service has no
close substitute.
B. Potential Anticompetitive Effects
The joint ventures permit the five major music companies to integrate forward into the newly
developing market for online interactive subscription services. If each of the companies had done so
through independent ventures, the market for interactive services would be as concentrated as the
market for producing prerecorded music. Although it might be preferable to have markets on both
levels that are less concentrated, it would be difficult to argue that the vertical integration, in itself, was
anticompetitive.
The joint ventures, however, do not simply replicate the market structure at the production level.
They create a substantially more concentrated market for interactive subscription services, increasing
the potential for anticompetitive effects both on the production level and on the distribution level.
1. Production of music: Ownership of online distribution channels by the producers of
prerecorded music gives those manufacturers an incentive to favor the distributors of their own music
over music produced by a competitor. This could occur either through refusals to deal with record
labels outside the joint venture or through unfavorable licensing agreements that raise their rivals’ costs.
The more concentrated the ownership of the distribution channels the greater the ability to exercise
market power to foreclose or disadvantage competitors in access to distribution, and the greater the
gains.
13
The two ventures control approximately 83 percent of current prerecorded music and are
evenly matched in terms of market share (42 and 41 percent). Individually, neither venture can
disadvantage competitors, because competing labels would still be able to market their music through
the other venture. The likelihood of successful collusion between the two ventures, however, cannot
easily be dismissed. Successful collusion depends on the ability to communicate the terms of a collusive
agreement and to police deviations. With only two firms controlling the market, a simple agreement not
to license music produced by labels outside each venture would be easy to communicate and enforce,
because the music available on these sites is publicly posted so that consumers know what the service
offers. An agreement to license outside labels on unfavorable terms, however, would be harder to
communicate and police.
What makes collusion less predictable in this market, however, is the question of the type of
service that will eventually be offered in the online interactive subscription market. It seems obvious that
consumers would prefer a service that offers a greater choice of music; indeed, advertising of these
services now stresses the amount of music that is available. To the extent that the record companies are
serious about competing in this market, and are not just interested in protecting their sales of physical
products from being “cannibalized” by interactive online distribution, there should be great incentives for
each venture to license as much music as possible from outside labels. This may make the gains from
independent behavior greater than the gains from collusion.
Current licensing behavior, however, should make one cautious about predicting whether the
two joint ventures will likely license widely from labels not owned by the ventures. At present, only
EMI (the smallest of the five companies) has its music offered on both sites, even though each of the co-
14
venturers is presumably legally free to carry music produced by owners of the competing venture.
Further, although there are some independent labels being offered on both sites, these offerings are not
substantial.18 Of course, there may also be legitimate reasons for the lack of such licensing, for example,
the difficulties involved in negotiating with numerous rights holders.19
18See Tom DiNome, You Listen, You Pay: Post-Napster Music Services, N.Y. TIMES,
March 7, 2002, at G9 (Pressplay offers 10 independent labels; Zomba offered on both MusicNet and Pressplay).
19See Amy Harmon, Copyright Hurdles Confront Selling of Music on the Internet, N.Y. TIMES, Sept. 23, 2002, at C1 (detailing the “obstacle course” confronting services that want to secure the necessary rights to sell music online) (“‘It’s as if Franz Kafka designed this system and employed Rube Goldberg as his architect,’ said Rob Glaser,” chairman of MusicNet).
Whether the major companies will change their practices in the future and license more broadly
is difficult to predict. If they do so, foreclosure of unaffiliated record labels from the market seems less
likely. On the other hand, if the major record companies do not choose to develop this market
aggressively, exclusion from it is not likely to have a great effect on competition in the production of
prerecorded music; traditional distribution channels will still be the most important. The net result, then,
would be little diminution in competition at the production level, although the opportunity that the
Internet offers for increased access by independent record producers to consumers will also not be
realized.
15
2. Online distribution: In the Internet environment new platforms have been invented to array
information in new ways that provide consumers with very different services than do physical stores.
Whether it is reverse auctions on Priceline, or auctions on Ebay, or the development of online travel
services by Travelocity, or the file-sharing service of Napster, consumers have benefitted greatly from
platform innovations.
The two joint ventures control over 80 percent of the inputs essential for operating an online
interactive music subscription service. This consolidates the power that the five companies have to
control the development of this distribution platform and diminishes the likelihood of competitive
responses by independent platforms. Indeed, given the concern these five companies have in protecting
the sale of music in physical form, their incentives are not necessarily to develop the online interactive
subscription market in the most innovative way possible. If anything, the five companies so far have
shown more interest in shutting down Internet distribution than in developing it. This may be an
understandable response to the free file-sharing services, but it is not one that has sought to take
advantage of the potential the Internet has for transforming the distribution of prerecorded music.
Control of these essential inputs by the two joint ventures, however, does not mean that others
cannot have access to them. Intellectual property, unlike other types of property, can be used
simultaneously by more than one party without destroying its value. Thus, the existence of the joint
ventures does not, in itself, mean that the co-venturers will not make their music available to other
interactive subscription services. Indeed, not only are there apparently no contractual restrictions
16
barring the five firms from doing so, all five have licensed a competing service (Listen.com’s Rhapsody)
and one of the five owns two other interactive subscription services.20
What are the incentives to license music to other online interactive subscription services or to
license music on equally favorable terms? Unlike the question whether each of these joint ventures
might carry music produced by outside labels to make themselves more competitive in the market for
interactive subscription services, the licensing by the joint venturers of their own music to competing
services will create competitors for them. Unless the owners of the joint ventures believe that an online
subscription service market with more competitors will be better for them, it seems unlikely that they
would engage in such licensing. And even if they did license other services, there would be great
incentives to impose licensing terms that disadvantage those competitors.
20See note 14, supra.
17
Again, current licensing practices would make one concerned about the likelihood of that the
five major companies will license their music fully to competing services. Although all five companies
have licensed Listen.com, these licenses are not the full equivalent of the licenses offered to the joint
ventures.21 With regard to licensing music to the competing joint venture, only EMI, the smallest of the
five, licenses its music both to the joint venture in which it has an interest and to the competing industry
joint venture. Indeed, the failure of the majors to license their music to each other’s venture is
particularly troublesome in light of the clear consumer preference for access to more music on a single
site.
C. Efficiency Justifications
Joint ventures allow firms to pool capital and spread risk; they may also permit firms to achieve
economies of scale or scope which reduce the cost of the product. From an antitrust perspective, such
ventures when engaged in by competitors can be procompetitive where they add a new product or
competitor to the market or achieve integrative efficiencies unavailable to the individual firms. On the
other hand, if the co-venturers might have entered independently and produced the same product, or the
efficiency gains are small, the joint venture may have a net anticompetitive effect.
21For example, Listen.com presently does not have a license from any of the joint venturers to
permit Rhapsody’s users to download and burn music to CDs. See also “Copyright Hurdles,” supra note 19 (record companies appear to favor their own service over others; Listen.com still does not have rights to popular Bruce Springsteen song, despite its being in record stores for almost two months).
18
The two joint ventures add two new competitors to the interactive music subscription market,
thereby increasing the choices available to consumers in a market whose product attributes are still very
much in flux. The joint ventures also presumably have some economies of scale and scope. That is,
there are likely cost savings in distributing, on one site, the prerecorded music of more than one
company and more than one genre (just as there are economies in such distribution in physical space,
which explains why retail stores do not restrict themselves to the music of any single record company).
There are also demand-side economies when more products that are similar are sold in the same place;
consumers economize on transaction costs by being able to engage in one-stop shopping.
It is difficult to assess the likelihood of independent entry, or the extent of the ventures’
economies of scale and scope, based on the publicly available record. The likelihood of any or all of
the five companies entering independently depends, in part, on their actual intentions, which are best
revealed in internal corporate documents. Nevertheless, file-sharing services, such as Napster, have
clearly stimulated consumer demand for online music and the industry has been greatly criticized for
failing to meet these consumer expectations. It thus seems doubtful that the record companies would
have been able completely to avoid offering interactive Internet subscription service of some sort, in the
least by licensing Internet content providers like AOL or MSN. As for the extent of efficiencies, it is
difficult to see why joint ownership is necessary either to produce the product in the first place or to
obtain economies of scale or scope in operation. Even if “one-stop shopping” required joint ownership,
neither venture offers such a service anyway; consumers must still subscribe to more than one service to
obtain a full range of music. In any event, the same economies of scale or scope could be achieved if
any of the five companies (or an independent firm) operated an interactive subscription service with
19
licenses from the non-owning record companies. There is no apparent integration of effort that comes
from common ownership by the music companies (as there would be, for example, in a joint venture of
a technology company and a music company).22 Even the savings on transactions costs appear slight.
Common ownership only internalizes the bargaining over the terms for supplying the music; it does not
eliminate the need to agree on the terms or the need to compensate the suppliers of that music.
III. Policy Responses
There are two basic policy approaches to the competition concerns identified above. One is to
alter the ownership structure of the two ventures. The other is to impose restrictions on the licensing
practices of the five major record companies.
The most obvious way to alter the ventures’ ownership structure is to require the record
companies to divest their ownership of the ventures. This would be the most procompetitive solution,
clearly altering the incentive structures of the two ventures and making them into independent
competitors in the marketplace. It would leave each of the interactive online subscription services free
to decide what prerecorded music it wanted to have under license, the types of services it would
provide in the marketplace, the license terms it would (hopefully) negotiate, and the prices it would
charge for its services. A subscription service unaffiliated with the music producers would not need to
consider the impact of its offerings on the physical distribution of prerecorded music, as the current
22See Federal Trade Comm’n and Department of Justice, Antitrust Guidelines for
Collaborations Among Competitors § 2.1 (efficiency gains often stem from combinations of different capabilities or resources, leading to lower price or improved quality).
20
ventures might. Such a remedy would also leave the music companies free to integrate into the
interactive online subscription service market on an individual basis.
Restrictions on entry, even when imposed for apparent procompetitive reasons, have the
potential for competitive harm. Many such restrictions have been removed after a period of years (for
example, the entry restrictions into local telephone service or the restrictions on motion picture
distributor ownership of movie theaters). To account for this, the restrictive period could be set out in
advance. There is also the possibility that, instead of full divestiture, the music companies’ ownership
interests in the ventures could be made more passive, for example, by restructuring the management of
the ventures and creating firewalls between the ventures and the music companies. Such restrictions,
however, might not adequately alter the incentives of the venture to favor its owners and disadvantage
rivals.
As an alternative, licensing restrictions could be imposed. The easiest would be to remove any
contractual restrictions either on licensing outside labels or on licensing music to competing interactive
subscription services. So far as appears, however, there are no such overt contractual restrictions. A
more likely remedy would be to forbid the record companies from discriminating in licensing between
the joint venture and other Internet distribution sites. That is, they would be required to license other
sites on the same terms that they license their own joint venture site, giving competing interactive
subscription services equal access to the necessary inputs. Similarly, the joint ventures could be
required to grant access to their sites to other sellers of prerecorded music on the same terms and
conditions as they grant to their owner-record companies.
21
Although divestiture might seem to be the more drastic approach, regulation of licensing might
end up being more difficult to carry out and may have unintended consequences on competition.
Differences in offerings are the precise way in which Internet distribution platforms often compete.
Compulsory licensing would tend to homogenize those offerings, a particularly unwanted outcome for a
product in its early stages of development. Further, compulsory licensing may require further review of
the terms of particular contracts. The incentives would be great for the joint venture participants to
structure their agreements in a way that would disadvantage competitors (for example, by requiring the
joint venture to pay high royalties). Review of such terms, however, would likely be a difficult process,
as it has been for other compulsory licenses of copyrighted music.23
Another question is what tools are available to achieve the appropriate policy response.
Legislation has been proposed to require nondiscriminatory licensing, but such legislation has not yet
been enacted.24 Antitrust relief is more promising. Both the Antitrust Division of the U.S. Department
of Justice and the European Commission have been investigating the two joint ventures since mid-2001,
but they have yet to complete their inquiries. Critical issues to the antitrust analysis are the contractual
terms of the joint ventures (for a finding of a violation of Section 1 of the Sherman Act) and an
assessment of the possibility of independent entry (for a finding of a violation of Section 7 of the Clayton
23See Library of Congress, Copyright Office, Determination of Reasonable Rates and Terms for
the Digital Performance of Sound Recordings and Ephemeral Recordings, 67 Fed. Reg. 45,240 (July 8, 2002) (reviewing report of the Copyright Arbitration Royalty Panel on rates and terms under the statutory compulsory license for webcasting; process began in 1998).
24See Music Online Competition Act.
22
Act). If a violation is found, an antitrust remedy could be imposed that would likely be more flexible
than one that would be imposed by the legislature.
IV. Conclusion
The two joint ventures raise substantial competition concerns in the interactive online music
subscription services market, particularly with regard to platform competition. The potential for adverse
competitive affects in that market is not outweighed by any efficiency gains, which could be attained by
the entry into this market by any one of the five record companies. The optimal policy solution would
require the record companies to divest their ownership of the two joint ventures. This would allow
these ventures to develop as independent competitors.
The Internet offers the opportunity to transform how prerecorded music is delivered to
consumers. As yet there is no fixed formula for selling interactive prerecorded music online.
Consumers will benefit most by policy solutions that will allow for maximum development of different
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