Monday, July 28, 2003

Antitrust News: Operatic Overkill

In a rare formal opinion, the Federal Trade Commission upheld antitrust charges against two record companies the Commission's lawyers say engaged in nefarious price-fixing:
Federal regulators upheld charges Monday that two companies illegally fixed prices when they joined forces to sell recordings of the opera stars known as The Three Tenors.

The Federal Trade Commission rejected an appeal by subsidiaries of French corporation Vivendi Universal and supported a June 2002 ruling by an administrative law judge who ordered the companies to stop anticompetitive practices.

The case involves 1998 recordings of the tenors Luciano Pavarotti, Jose Carreras and Placido Domingo performing at the World Cup soccer finals in Paris.

In 1997, Warner Communications Inc. formed a joint venture with PolyGram Music Group, which was later acquired by Vivendi. Warner was to distribute the recordings in the United States, while PloyGram would handle overseas distribution.

The FTC said the two companies feared videos and albums of the 1998 concert wouldn't sell as well as those from the trio's first two World Cup appearances in 1990 and 1994. So the companies agreed to restrict discounts and advertising for the older performances before and after the release of the 1998 recordings, the FTC said.

"Restraints on price discounting and advertising are inherently suspect," FTC Chairman Timothy Muris said in the ruling. He said the agreement between companies sought to deprive consumers of the "vigorous competitive offering of certain products to induce them to choose others."

The FTC voted 5-0 to uphold the ruling against Vivendi's subsidiaries. That ruling found that the agreement with Warner violated federal antitrust law, because the two earlier recordings were not jointly produced by the two companies.
Chairman Muris' 61 page order is itself a virtuoso performance in which he barely hides his prejudicial contempt for the perfectly justified conduct of the two record companies:
Nessun Dorma! – None must sleep!

This Puccini aria, sung by tenor Luciano Pavarotti in the recording at the heart of our case, announces the edict of the Chinese princess Turandot that no one in Peking may sleep until she solves her problem. The princess has made a bad
judgment – agreeing to marry the first suitor who, at peril of death, can answer three riddles. Although this plan once had served her purposes, someone has now answered the riddles, and Turandot is encumbered with a product she neither wants nor can market. She grasps at one last chance to stop the wedding, by guessing the name of the suitor, and will stop at nothing to obtain the information.

Our story takes place not on the opera stage, but in the business world of operatic recordings. The drama is not so stirring, and no one loses his head, at least not literally. The story is troubling, nonetheless. Two recording companies agree to form a joint venture to market a new recording, by three of the world’s foremost singers, and to split the costs and profits. By itself, such an agreement, even by competitors, is often beneficial, because it helps bring a new product to market. Here, however, the story turns dark when it becomes apparent that the new recording will repeat much of the repertoire of existing recordings, diminishing its marketing potential and worrying the recording companies. While other businesses might have worked harder to develop an improved or more distinctive product to attract greater consumer interest, our protagonists chose another route. They agreed to restrict their marketing of competing products that they respectively controlled – products that were clearly outside the joint venture they had formed. They imposed a moratorium on discounting and promotion of those recordings that might otherwise siphon off sales of the new product. We now consider whether such an agreement unreasonably restrains trade in violation of the antitrust laws. We conclude that it does.
Dramatics aside, Muris is saying that a company violates the antitrust laws simply by making a business decision the FTC's lawyers disagree with. In this case, Muris said the companies should have produced a better album with more original material; because they didn't, that constitutes a legal injury to consumers who, depending on how you look at it, have a right to either lower prices or a new Three Tenors album every four years.

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