The record business will cough up more than $140 million in cash and donated compact discs to settle a long-running antitrust lawsuit brought by the attorneys general from 42 states. At issue is a sales and advertising arrangement that the states claim amounts to price-fixing.
While the five major labels and three national CD retailers named in the case have admitted no wrongdoing, they will pay $67.4 million in cash and hand over almost $76 million worth of music -- roughly 5.5 million CDs -- in a settlement that has been several years in the making.
The deal effectively closes the door on a controversial policy called minimum advertised pricing, or MAP, adopted by the music industry in the 1990s. Under the scheme, labels withheld advertising subsidies from any retailer that set CD prices below a predetermined threshold.
Labels and music sellers agreed the MAP policy was necessary to combat so-called "loss-leader" pricing, through which broadline retailers such as Best Buy and Wal-Mart sell CDs at a loss to lure customers in for bigger purchases, such as DVD players or refrigerators.
But the Federal Trade Commission and the attorneys general felt differently, arguing the policy amounted to antitrust activity and compelled consumers to pay more for their music than the open market would dictate.
The FTC in May 2000 signed agreements with the Big Five labels that enjoined them from enforcing MAP policies with retailers. At the time, the agency claimed the policy had been used to bilk consumers out of nearly half a billion dollars for the three years prior to the settlement -- a figure the industry fiercely disputed.
Ironically, the labels themselves have since resorted to aggressive pricing schemes for their major new releases -- dropping the retail cost on discs to as low as $8.99 in some cases -- in a bid to lure consumers back into stores during a harsh market downturn.
Under Monday's agreement, sources said the labels and retailers will divide up the payment responsibilities based on market share and the degree of their participation in the sales agreements.
That means market leader Universal Music will pay the biggest chunk, while fifth-place EMI will have a smaller share of the bill. The cash payment will be split among the states for disbursement to consumers, while the CDs will be donated to charitable causes and educators.
"This is a landmark settlement to address years of illegal price-fixing," said New York State Attorney General Eliot Spitzer, who led the case for the states. "Our agreement will provide consumers with substantial refunds and result in the distribution of a wide variety of recordings for use in our schools and communities."
The labels themselves characterized the settlement as more of a business decision than a legal or ideological defeat.
"Today's settlement does not state that there was any wrongdoing and we continue to believe that MAP was an appropriate and lawful business practice," said BMG in a statement. Likewise, Universal said it thinks MAP "would have been found by the court to be legal and in complete compliance with both state and federal antitrust laws."
EMI and Warner Music Group voiced similar sentiments about Monday's settlement. Sony Music declined to comment.
The three retailers named in the settlement -- Trans World Entertainment, Tower Records and Musicland Stores -- were not immediately available for comment.