James Delahunty
15 Jan 2006 14:08
New York Attorney General Eliot Spitzer recently launched an investigation into price fixing in online music sales but now he is also being requested to investigate how record labels charge music subscription services, such as those offered by Napster and Real. Sources inside the music industry say that each agreement made between a major record label and a service includes a "most favored nation" clause. MFNs basically mean that a service would have to increase payments to a label if another label strikes a better deal.
So for example, if Label A was receiving 10c per a song streamed to a customer, then Label B signs a deal for 12c per song, Label A automatically will now also get 12c per song. It is a common practice in retail for example, where a company would come to an MFN agreement with a wholesaler. However the existing music subscription services frown upon MFNs being involved in their business.
"Seller-side MFNs are inherently price-increasing and anticompetitive," says Jonathan Potter, executive director of the Digital Media Association. Among the members of the Digital Media Association are Apple, MSM, AOL, Yahoo, Napster, MTV, MusicNet Inc. and RealNetworks. MFNs cause a collusion on pricing and force subscription services to pay additional costs, which might made up by charging consumers more for the service.
Of course, subscription services actually have to agree to MFNs, but most probably have had no choice but to accept it in order to get access to a label's music. It will be interesting to see if anything will come from this.
Source:
Arstechnica