Vivendi-MP3 deal raises regulatory eyebrows

Sue Zeidler

LOS ANGELES: Controversy and online music seem to go hand-in-hand and the

next big showdown may be in Washington, where the recording industry's online

tactics could come under fire from Congress and top-level regulators, experts

said on Monday.

In a sign of how quickly the industry has shifted to embrace the Web, Vivendi

Universal on Sunday said it would buy its one-time legal foe Web music firm

MP3.com for $372 million to bolster its online business. But having waged a

legal battle against MP3.com and other online start-ups for more than a year,

the recording industry may now stand accused of having set out to control more

of the Internet distribution business itself, a charge that could raise

antitrust concerns, analysts said.

"Some firms believe legislators think the record industry's copyright

battles were all about trying to control the space," said Eric Scheirer, an

analyst with Forrester Research. "If you read the Vivendi/MP3.com deal, it

seems that Universal pursued an aggressive lawsuit against MP3.com, made it

cheaper and then purchased it. The Congress may find such deals somewhat

disturbing," he said.

The Vivendi Universal move underscores how fast the music conglomerates are

now moving to get their songs online after fighting tooth-and-nail against Web

companies like song-swap company Napster and MP3.com for copyright infringement.

With key legal victories against both under their belts, the big labels have

entered into elaborate joint subscription ventures. This has split the industry

into two rival camps: Universal's Duet joint venture with Sony Music and

MusicNet - a joint venture between RealNetworks and AOL Time Warner Inc., owner

of Warner Music Group; and Bertelsmann AG, owner of BMG Entertainment and EMI

Group Plc.

Dual paths to music on the Net



"The whole online distribution chain will have to be examined at some
point. Pretty soon, there will be just two options for getting music on the

Internet," said Ken Freundlich, an entertainment attorney in Los Angeles.

"The reality is that there are a lot of arrangements being made and

acquisitions which would probably raise some eyebrows from an antitrust

regulatory point of view," he said.

Like Vivendi Universal, many of the label giants are now scooping up smaller

Web pioneers such as MP3.com, which have plunged in value as a result of their

litigation.

Control of the flow of music and music sales has long been a subject of

government scrutiny, with regulators recently blocking proposed mergers between

music giant EMI and AOL Warner and then EMI and Bertelsmann. Regulators have

also launched CD price-fixing probes into the industry, both in the US and in

Europe.

At a Congressional hearing last week, Californian Democrat Howard Berman also

raised a concern over the online distribution efforts of the conglomerates.

Officials at the Securities and Exchange Commission and Justice Department

declined to comment on Monday.

After a federal court ruling against MP3.com in April 2000, the San

Diego-based firm paid over $160 million to the five major labels - Universal,

Sony, BMG, Warner Music Group and EMI - and music publishers. Universal Music

refused to settle with MP3.com and ultimately won a bigger judgment than the

other labels.

Potential to control pricing



In November, MP3.com relaunched its controversial service, My.MP3.com -
which lets users listen to their own CDs online from any computer - with

licenses from all the five labels.

Vivendi Universal said it had acquired these labels' licenses as part of its

MP3.com acquisition, which irked some competitors. "You have a potential

where Vivendi can control pricing on everyone else's content through its own

distribution channel," said one online executive at another label.

"This deal is not only going to wake up Congress, but I expect several

regulatory bodies like the Securities and Exchange Commission and the Department

of Justice to take a look at this," the executive said. Musicians and music

publishers have also raised concerns.

"Its disconcerting that we're finding the online distribution path is

now being consolidated and controlled by five companies," said Noah Stone,

executive director for the Recording Artist Coalition, a trade group led by

singer Don Henley. "I have no doubt that major labels will provide music

online but we have to keep asking the question of how artists will be

compensated." MP3.com still has outstanding legal claims, but Vivendi

Universal said it had taken the necessary measures to protect itself from any

remaining legal risks."

(C) Reuters Limited 2001.