MusicNet, Pressplay probe began months ago

Although reports that the U.S. Department of Justice (DOJ) was launching a preliminary investigation into MusicNet and Pressplay rocked the online music world this week, an industry source close to the investigation said Tuesday that the DOJ in fact began investigating the online music services "several months ago."

The source said that the probe was initiated out of the DOJ's antitrust division in response to "disillusionment with the business practices of the record companies" from "multiple parties at every level of the music value chain," including recording artists, record stores, and online music services.

News that the DOJ launched an inquiry into MusicNet and Pressplay's licensing practices and copyright rules began to swirl Monday, despite the fact that all parties involved have been staunchly mum on the subject.

The investigation reportedly centers around concerns that MusicNet, formed by AOL Time Warner Inc., Bertelsmann AG, EMI Group PLC and RealNetworks Inc., and Pressplay, backed by Vivendi Universal SA and Sony Music Entertainment Inc., will form a duopoly in the online music industry.

Both services are due to launch in September, and are expected to eventually cross-license each other, giving them control of some 80 percent of the world's inventory of licensed music. Fears have arisen that the labels will use this power to squeeze independent players out of the online music game by refusing to license music to them and by controlling the distribution of royalty fees.

Amid these concerns, a bill was introduced in the U.S. House of Representatives last Friday seeking to amend copyright law and ensure online music competition.

The bill, entitled the Music Online Competition Act (MOCA), would enforce nondiscriminatory licensing of sound recordings and limit the amount of royalties online broadcasters would have to pay for copies of music incurred during its delivery to consumers, as well as addressing other issues.

While announcing MOCA, the bill's authors, Congressmen Chris Cannon, a Republican from Utah, and Rick Boucher, a Democrat from Virginia, said that although they lauded the upcoming launch of MusicNet and Pressplay, they feared the two services would dominate the market.

Indeed, industry watchers did not appear surprised this week at reports that the DOJ is investigating the nascent online music services.

"The music industry and antitrust investigations have been longtime companions," said Mark Fischer, a new media attorney at Palmer, Dodge LLP.

Fischer added that it's a fair question to ask whether the recording industry's control over its online distribution channel provokes antitrust concerns.

"It changes very much the dynamic and market power (when the labels control distribution)," Fischer said.

It seems that the market shift presented by the labels' excursion into online music was immediately recognized, given the industry source's assertion that the DOJ began investigating MusicNet and Pressplay long before MOCA was crafted and soon after the services were announced.

With the heat significantly turned up on the music industry, it looks as though MusicNet and Pressplay will continue to endure scrutiny for some time.

"They have to come to an understanding they can't control the entire supply chain, and there's no reason to, " noted Ric Dube, a music analyst with Webnoize Inc. "A rising tide lifts all boats."

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