More on criminal price-fixing conspiracy by Big Music

Jose G. Perez jg_perez at
Wed Aug 9 22:12:05 MDT 2000

    As I suspected, Big News has buried or refused to cover at all the
antitrust action filed Tuesday by 30 state and commonwealth (colonial
territory) governments against Big Music for a criminal price-fixing
conspiracy that began in 1995. In addition, such reporting as there
has been has downplayed the scale of the suit.

    To get a feel for just how shamelessly rapacious the five-member
record cartel, which acted in concert with the big CD stores chains
has been, people should read the complaint:

    The figure being provided by the press, $480 million in damages,
is NOT what the states are asking for. That figure is the one the
Federal Trade Commission came up with when it decided to let Big Music
completely off the hook without so much as an apology or slap on the
wrist in exchange for a promise to sin not more. The States say they
are doing their own damage calculations, which they've not yet

    An HONEST accounting will be considerably more than $480 million.
One of the state A.G.'s calculated that the overcharge was "several
dollars" per CD; another said $2 each. CD sales last year were
something like $14 billion. If the average price of a CD were $20 (in
fact it is not yet quite that high), and we take the lower $2 per-CD
figure, that means 10% of $14 billion, or $1.4 billion for last year
ALONE. And this has been going on since 1995.

    The complaint quotes industry sources who said that in the early
90's CD prices fell from an average of $15 to $10, as discount
retailers entered the CD market in force. That decline in price is
what the price-fixing conspiracy was explicitly and publicly set up to
reverse, and it did in fact reverse it, even while manufacturing costs
of CD's continued to drop.

    This was no secret, conspiratorial operation, but brazen and out
in the open. The plan was proposed in a keynote speech to an industry
convention by one of the heads of the companies now being sued. And in
the next year, the big records-only or -mostly retailers like Tower
Records and the Big Six (now Five) left an extensive documentary
record of memos and letters as to what they were doing and why. Which
makes you wonder why it took so long for the government to notice.

    Could it have been related to Time Warner's decision a few months
ago, announced with much corporate pride and lots of I thank thee God
I am not like other men rhetoric, that this conglomerate would no
longer make any "donations" to political candidates, parties and slush

    Microsoft basically had that position until three or four years
ago, but now they've become very good "corporate citizens" in the
world of campaign financing.

    At any rate, to realize just how outrageously people are being
ripped off, it is necessary to think about how cheap are CD's to make
today in runs of many tens of thousands. The exact figure is a
closely-held secret of Big Music, but you can judge from how AOL
carpet-bombs the country with its "500 hours free"  CD's, which, from
a manufacturing point of view, are no different from music CDs. The
must cost, at most, pennies each. The "jewel boxes" probably cost more
and those go for about a quarter each retail.

    So the states might well come up with a higher figure than the FTC
did during its whitewash. And they are not just asking for damages;
they're asking for triple damages as the Sherman Act specifies, and
the maximum civil penalties provided for  by federal and state laws.
Even assuming the FTC's figure of $480 million is correct, that
suggests the exposure of the Big Five record monopolies is somewhere
north of $1.5 Billion.

    When you start putting a "b" in front of "illion," you start
getting into real money, even for the likes of Sony and Time-Warner.

    The lawsuit is especially bad news for this last conglomerate, as
everyone from consumer groups to rival pirate gangs (such as Disney
and NBC) are demanding the government block its proposed merger with
AOL. Time Warner is (depending on the week) #1 or #2 cable operator in
the country; it is also the #1 provider of basic cable channels
(mostly the Turner channels) and premium channels (HBO/Cinemax). It is
in bed with the other big cable systems operator, AT&T (which will
become the definitive #1 when its Media One acquisition goes through
if it hasn't already). It controls so much of the content, including
perennial number 1 or 2 cable "network" TNT, perennial number 1
"superstation" TBS; AMC rival Turner Classic Movies; CNN and its eight
spin-offs; Court TV; the Cartoon Network; as well as the most popular
premium services, as well as the over-the-air WB network that it has
ALL cable, satellite TV and "wireless" cable operators by the short

    Not that it, strictly speaking, needs to do much squeezing, as it
is, of course, ALSO part of the cartel that runs the sole surviving
satellite TV company, which is cable's real competitor. I suspect this
is why Satellite TV's pricing is so unaggressive, even though clearly,
with basically fixed distribution costs whether they have 100
subscribers or 100 million, offering Satellite service for, say, half
or 2/3rds of what cable operators charge would pay off handsomely. As
things stand, however, it can take years for a satellite subscriber to
amortize the cost of equipment and installation, and you don't get to
hook up as many TV's as you want to the feed: If you want an
additional TV with satellite you have to buy another decoder, and pay
an additional monthly fee. If you want more than two, you're out of

Together, the big cable companies have already set up one cartel to
deny cable subscribers their choice of ISP's through exclusive
contracts with Road Runner, which they own. This "service" has been a
gigantic flop, despite its stranglehold on fast Internet access via
cable connections, mostly because it's only been in the last year or
two that the cable companies have begun to roll out "broadband"
Internet access widely. Sure, the cable guys TALKED a great deal about
digital convergence and 500 channels and so on, but in fact they did
not want to roll it out without having guaranteed monopoly
superprofits. It was only the phone companies overcoming major
technical and practical problems with DSL that forced the cable
companies to actually DO something. The problem is that everyone wants
cable at $20, but at $30 subscribers start to drop off and going much
past $40 gets you into the area where you lose more revenue from
dropped subscriptions than you make with higher fees, and even
throwing in the "basic" HBO channel (which at this point is mostly a
vehicle for promoting its higher-paying services) doesn't help. So
until it started to look like they might lose the broadband market to
DSL, the cable companies stood pat. It may well be they're too late,
as the phone companies don't need to do as much to offer DSL whereas
the cable distribution network needs to be extensively rebuilt.

TW also controls major TV and movie studios, oodles of music labels, a
truckload of magazines, book publishers, etc.

    AOL is by far the biggest dial-up access provider to the Internet.
Its monopolistic intentions are quite clear from the fact that it
doesn't use industry-standard protocols to connect to the Internet but
rather its own software "adapter." Also, in developing its client it
is moving more and more to sharply differentiating between AOL content
and what's available on the Internet, and channeling people to its own
content instead of the web's. Version 5 of the client even violates
the most basic user interface conventions in its effort to pressure
and push people toward AOL material (and the ads and other forms of
hucksterism thereon): The close box on its opening screen does not
close the window, it minimizes it to a little bar within the bigger
AOL Window. And it has created a separate "tier" --at double the
price-- for users with fast interconnect connections.

    At a time when it is becoming increasingly clear that ALL
entertainment, broadcast, news and information services will be forced
to migrate to digital formats for online distribution, there is no
doubt where AOL wants to go, and also the reason they want Time Warner
(and vice-versa). Their strategic aim is to create a private, closed,
pay-by-the-byte Internet, with proprietary protocols down to the
transport layer that can only be accessed through their proprietary
client or set top box. AOL already has a dominant position as a dialup
ISP; TW will give them direct control (in the case of TW cable
systems) and great influence (in the case of AT&T) over the fattest
pipe into people's homes, which already reaches virtually everyone AOL
is interested in (the better-off half of the population).

    Especially significant is AOL's and Time Warner's REFUSAL to
formally commit to cable subscribers having their choice of ISP's, and
its REFUSAL to formally commit to give equal facilities and access, in
other words, a level playing field, to such ISP's as it does allow
onto its cable lines. A year ago, AOL was leading the charge by IPS's
demanding that federal regulators or Congress write those fairness
requirements into the laws.

    Imagine the uproar if the phone companies only allowed some ISP's
and not others to offer dialup access over their lines! Yet this is
precisely the "right" AOL-TW wish to reserve to themselves! And
imagine if the phone company refused to allow plain old TCP-IP
connections, but instead you had to use a special proprietary
protocol, forcing you pretty much to go through their access and
servers FIRST, not matter WHO you were connecting to as an ISP. THAT
will be precisely the situation if AOL-TW get to put a proprietary
"set top box" on top of your TV or proprietary networking software in
your computer.

    There is only one possible reason for AOL insisting on using
proprietary protocols instead of the faster and more robust
Internet-wide schemes. And that is controlling what you do online.
Worse, its protocols do not peacefully coexist with the standard ones.
For example, employees of a certain company about to be acquired by
AOL are being offered free AOL accounts. The material containing the
special CD with the offer warns people to use it only at home, not to
install AOL on the company's computers at work! And in at least at one
of the divisions of this company, any computer on which AOL client
software is detected is treated as if it were carrying the computer
version of the plague: the standard procedure is to wipe the entire
hard drive clean to remove even the last trace of AOL, do a complete
reinstall of everything (except AOL) and a complete reconfiguration of
the computer's network access.

    Ownership of TW will also give AOL control over the biggest hoard
of "copyrights" in the world, especially movies, and one which Time
Warner has yet to effectively exploit (for example, MOST of the TW
movie library remains in the vaults; they simply don't have (yet)
enough cable channels to dump it all on the public. TW and other movie
studios are doling out DVD releases of their backlist with an
eyedropper, afraid of undercutting their current releases (a very
understandable fear, given the crap they're putting out nowadays). A
fat several-megabit pipe into homes will allow them to create
countless virtual channels, featuring everything from (say) racist
cartoons from the 30s, 40s and 50s to a movie channel devoted
exclusively to the works of victims of the 1950s Hollywood Blacklists.

    Both TW and AOL have been dying to do this; TW even set up a
prototype of this future system in Orlando (which was, satisfyingly, a
resounding flop) and AOL is trying it now through its AOL-TV service,
which attempts to fuse AOL's "most popular" features with,
essentially, cable TV. I doubt very much that AOL's
training-wheels-on-wheelchairs TV service will get much farther than
TW's "full service network" did in Orlando, but sooner or later they
will probably hit on a formula that will let them leverage all the
different kinds of assets they control just as Microsoft leverages its
control of PC operating systems. At that point you'll see the same
phenomenon you can see in the software industry. Prices for software
have dropped from several hundred dollars/package to a few dozen
dollars in fields where there is still competition while the price of
the OS has doubled. At the same time, the number of users among whom
development costs for the OS can be amortized have gone from a few
million for a typical DOS release to hundreds of millions today.

    The claims of TW Duce Jerry Levin and AOL Fuehrer Steve Case that,
really, there's no reason for concern, the two companies are in
different businesses, are disingenuous. Levin in particular has been
among the biggest in hyping each and every fad to come down the pike
in the last decade, from the 500-channel future of cable to the "full
service network" to "digital convergence" (which I guess must've been
last year's buzzword, I haven't heard it in a while). All of this hype
has been predicated on one and only one correct insight. "Content,"
once it goes digital, is just a string of ones and zeros, and there's
no difference at that level between the latest blockbuster movie and
the digital expression of 2+2=4. Looking forward, AOL and TW are in
EXACTLY the same two businesses: a) creating series of ones and zeros
and b) transporting and delivering those to people's homes and other
places. In addition, TW is ALSO in the business of owning the pipe
through which the ones and zeros travel.

    Strictly by bourgeois standards, the merger should never in a
million years be allowed to happen, and instead these companies (and
their twins) should be broken up. Under capitalism, cable is as much
of a "natural monopoly" as railroads. Ideally, under capitalist
regulatory theories, such monopolies should be split into three
distinct businesses which people are not allowed to mix into one
enterprise. You can either own the railroad line, provide transport
services over that line, or own the merchandise being transported, but
not two of the three and certainly not all three. Whenever the
businesses are mixed, they must be strictly regulated otherwise they
will fleece all the other capitalists.

    One can only speculate why the state AG's are claiming to be going
after the record companies with a hatchet, and no one knows if they
will really follow through. One obvious explanation is that this is
pretty much a looting expedition: politicians like to have the extra
cash on hand without raising taxes. They are also, frankly, picking on
guys who have made a point of alienating the public by going from
merely outrageous prices to truly extortionate ones in just a few
years. That Big Music has further enraged the public by its war on
people sharing music over the Internet only makes the lawsuit more
popular. And, of course, folks that are real fans and follow the music
industry closely are aware of how badly these same folks rip off the
artists, even while they try to hide behind them in fighting

    Of course, even a multi-billion-dollar judgment is hardly just
punishment. What this case cries out for is confiscation of the
criminal enterprises as provided for under the RICO laws. And since
these same five monopolies have ripped off the artists just as badly
as the public, it would be only just that all copyrights, masters,
etc., be returned to the control of the artists, composers, etc., who
created them.

    One last detail about the suit itself: the states are demanding a
JURY trial. That's a threat not entirely without significance, when
you consider that the record monopolies are about as popular with
music buyers as Firestone is right now with buyers of Ford SUV's.


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