Antitrust Probe of Music Firms Intensifies

The Justice Department has intensified its antitrust investigation of the music industry’s licensing practices, demanding that industry organizations and online companies submit a slew of documents related to Internet music services.

The department recently began sending out “civil investigative demand” letters, hunting for evidence of collusion by record companies and affiliates to impede competition. The recipients of the letters include the Recording Industry Assn. of America, at least two Internet companies and MusicNet, an online music distributor jointly owned by three major labels and RealNetworks Inc.

A copy of one letter obtained by The Times indicates that antitrust investigators are looking at all the terms proposed by the record companies and music publishers for their licenses, as well as the lawsuits they threatened, brought or settled over online music. Another issue being explored is the contentious negotiations over online radio services.

The major labels control the copyrights to most of the recordings that consumers buy, while the publishers control the songwriters’ copyrights. That control gives the labels and publishers the power to dictate which companies can offer interactive or on-demand music services online, as well as influencing their prices and terms of use.

The growing demand for online music services has led the conglomerates that own the major record companies to create their own channels for distribution. AOL Time Warner, Bertelsmann and EMI Group formed MusicNet, and Universal Music Group and Sony Corp. created Pressplay.

The inquiry appears to revolve around two questions: Why are MusicNet and Pressplay the only ventures to receive licenses for a significant amount of major-label music? And what, if anything, did the labels do to inflate their royalties from online radio services?

The record companies’ defenders say the labels have been cautious in licensing, but they haven’t colluded to limit competition. “I don’t see it, and I haven’t experienced it,” said Robin D. Richards, chairman and chief executive of MP3.com, a maverick online music company that was acquired in August by Vivendi Universal and has a distribution deal with Pressplay.

But executives at several online companies say they have had mixed experiences with the labels and that some act fairly and some don’t. The result, they say, is that the labels’ online ventures--MusicNet and Pressplay--are launching this year without any real competition.

The industry’s licensing practices also have drawn criticism from some influential lawmakers, including leaders of the House and Senate Judiciary committees. In addition, the federal judge presiding over the industry’s copyright-infringement lawsuit against Napster Inc., the embattled online song-sharing service, recently said the labels’ licensing actions could make them vulnerable to accusations of copyright abuse.

The law doesn’t force a label to grant other companies the rights to its song, copyright experts say. What investigators are probing is whether the labels have used their exclusive rights over music to slow or stop competitors in a new field, namely, the distribution of songs over the Net.

The Justice Department could not be reached Sunday for comment. A spokesman for the RIAA said, “We intend to cooperate fully” with the investigation.

Spokesmen for two of the major labels--Universal Music Group and BMG Entertainment--declined to comment on the investigation. Officials at two others--Sony Music and Warner Music Group--could not be reached.

Those companies have announced few deals with online music distribution services comparable to the ones they’ve made with Pressplay and MusicNet. The only major label signing significant licensing deals is EMI.

Ted Cohen, vice president of new media at EMI Recorded Music, said, “I think we’ve been very fair in our negotiations, giving the big guys and the little guys a chance to launch. We’ve worked very hard to make sure it’s a competitive landscape.”

Justice Department attorneys started conducting interviews about the labels’ licensing practices more than eight months ago, responding to complaints from online music companies. The investigators’ interest picked up in early April, sources said, when the owners of MusicNet announced its formation.

A more formal probe didn’t begin, however, until the government resolved a jurisdictional battle between the Justice Department and the Federal Trade Commission’s antitrust investigators. The Justice Department completed a final round of interviews with industry executives and online companies last month, then sent out a wave of civil investigative demand letters last week.

Among other things, the letters demand copies of all the proposed and final licenses, any analyses made of the terms, and any documents discussing how much music is needed to launch a successful online business. They also seek copies of any document since Jan. 1, 1997, related to online radio services and the royalties to be paid to the labels.

Sources inside the online music industry say the investigators are looking for evidence that the labels cooperated on licensing to prevent competition to MusicNet and Pressplay. Because the labels were willing to license an online venture they owned, they may have a harder time defending their decisions not to grant licenses to competing online music companies, these sources said.

Several executives at online companies also contended that they received identical proposals from all the labels for some elements of their licenses. And they said that some labels have insisted on “most-favored-nation” treatment, meaning that they would have to be given the same terms as any other label that negotiated a better deal.

Record industry insiders, on the other hand, insist that the labels reviewed and complied with antitrust laws when setting up MusicNet and Pressplay because they recognized the potential legal minefield.

Officials at Warner Music Group and EMI have said that they don’t typically ask for most-favored-company clauses. Spokesmen for the other labels have declined to discuss their licensing terms.

On the Internet radio issue, Congress gave the RIAA an antitrust exemption permitting it to negotiate licenses for conventional online radio stations on behalf of the labels. But sources within the online music industry said the Justice Department is exploring whether the labels overstepped that exemption by forcing Web broadcasters to negotiate license deals only with the RIAA, or to obtain licenses from the RIAA before seeking deals for other services.

A source close to the RIAA, who spoke on the condition of anonymity, said he was confident the Justice Department would find no evidence of impropriety. “It’s the licensees who have wanted one-stop shopping, they have been demanding it,” he said.