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Web Music Services Face Antitrust Investigation

The U.S. Justice Department has launched an antitrust investigation into two online music services, both scheduled to launch this fall, that are backed by the world’s largest record companies.

According to two senior executives in the record industry, federal investigators notified the record labels that they intend to examine possible anti-competitive aspects of the digital music ventures created by the music industry’s big five: Universal Music Group, Sony Music Entertainment, Warner Music, EMI Group and BMG. The Justice Department does not comment on ongoing investigations.

The two online services under investigation, MusicNet and pressplay, are the record industry’s best effort to fill the void left by the once-popular renegade music-swapping service Napster, which has been shut down for more than a month.

One record company executive fumed, “For the past five years, this industry has been endlessly investigated by the government. They find nothing. And it costs us a fortune.” The executive, speaking on condition of anonymity, added, “It’s a handy whipping boy.”

Justice Department officials have contacted attorneys for the record labels to notify them of the probe, and federal investigators have begun questioning fledgling online music companies and trade groups, industry sources say. The investigation is still in its preliminary stages and no charges have been filed.

Both MusicNet and pressplay declined to comment.

The inquiry follows an investigation launched by European regulators in June, after independent music producers complained that MusicNet and pressplay could potentially lock them out of lucrative online distribution deals.

In the United States, the Justice Department reportedly received complaints from small online music services, which claim to have been refused licenses by MusicNet – the partnership of streaming-media giant RealNetworks and AOL Time Warner, Bertelsmann AG and EMI Group, according to one source close to the venture.

Focus on big players

MusicNet sells to online subscription services, such as America Online, the technology and the licenses they need to distribute songs over the Internet. But it has reportedly focused on building powerful distribution partners – including AOL and the once-giant music-swapping service Napster – that can reach the broadest possible audience, to the exclusion of smaller sites, sources said.

“We did make one inquiry to someone who was a consultant to MusicNet as to what they were doing in terms of licensing,” said Tuhin Roy, executive vice president of strategic development at Echo Networks, a San Francisco-based Internet radio company. “What I learned from that contact – who is still a consultant to MusicNet – is they’re not engaging smaller entities at this point. They’re targeting four or five large companies to be distributors.”

Up-front payments

MusicNet allegedly requires companies to commit to advance payments of as much as $750,000 before entering into licensing talks, according to Roy and others.

“That’s unusual,” said Roy. “In all my years in the business, I’ve never heard of anyone having to put up money to be in a negotiation.”

Pressplay, the joint venture that brings together music giants Universal and Sony, is also part of the Justice Department’s probe, although details have yet to emerge about the focus of the investigation.

Unlike MusicNet – which is designed as a distribution service – pressplay is intended as a complete online subscription service, which sets prices for its own prices for digital music. Pressplay will also offer its service through Yahoo and Microsoft’s MSN.

The investigation marks a dramatic change of fortunes for the record labels, which faced mounting pressure from Congress to embrace digital music distribution. This spring’s unveiling of MusicNet and pressplay – coming on the eve of Senate hearings about the state of online music – were hailed as a long-overdue change of heart by a reluctant music industry.

Congress continues to prod the recording industry. As recently as Friday, a pair of legislators introduced bills that would rewrite music licensing and copyright laws to promote competition among online music-service distributors and make it easier to buy and sell digital songs.

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