Online Music Ventures Being Probed

Even as Congress prods the recording industry to accelerate the slow pace of its online music sales, Justice Department officials are investigating whether two budding ventures--backed by rival alliances of the top labels--have gone too far.

Government officials have opened a preliminary antitrust examination into MusicNet, formed by AOL Time Warner Inc., EMI Group and Bertelsmann, and Pressplay, a joint venture of Sony Corp. and Vivendi Universal.

Sources familiar with the probe say government officials began informally notifying music companies in recent weeks, but the scope of the investigation remains unclear. Label executives are expected to meet voluntarily with antitrust officials in the next month to discuss the ventures, according to a source at one of the companies.

It is common for antitrust officials to request additional information when large competitors team up to offer products. A similar government probe is pending into Orbitz, an online ticket company formed by major airlines. Another inquiry into Covisint, an auto-parts consortium created by major car makers, closed without action.

The online music inquiry follows a similar investigation, announced in June, by European antitrust officials. Mario Monti, competition minister for the European Commission, said he wanted to focus on whether MusicNet and Pressplay were offering consumers enough “diversity of service providers.”

Industry critics, including many online music retailers, have complained to antitrust officials and legislators that the major labels have been refusing to license their music until the labels’ own online ventures are up and running.

“The concern [of online retailers] is that they are going to get cut out,” said Jonathan Potter, executive director of the Digital Media Assn., a trade group representing music Web sites and retailers.

On Friday, Rep. Rick Boucher (D-Va.) warned that the major labels were creating a “duopoly” that could hurt smaller rivals and reduce choice for consumers.

Boucher and Rep. Chris Cannon (R-Utah) introduced legislation that would require music companies to give the same terms to outside music providers that they offer their own joint-venture partners.

Recording industry representatives say they are committed to selling music online but first want to work out copyright and licensing issues to ensure they are paid for their materials.

On Friday, Hilary Rosen, president of the Recording Industry Assn. of America, said the industry would fight to defeat the Cannon-Boucher bill.

“The marketplace is already moving in the right direction,” she said. Rosen declined to comment Monday on the probe. Officials at the major labels also declined to comment, as did a spokeswoman for the Justice Department.

Privately, industry officials complained that the government inquiry contradicted efforts in Congress to spur the industry to speed its entry into online music.

“It’s a Catch-22,” said one label representative. “On the one hand, they want us to get the music out as quickly as possible. On the other hand, now they’re saying [the joint ventures] may not be the right way to do it.”

MusicNet and Pressplay, both due to launch in late summer or early fall, will be subscription-based services, offering consumers the opportunity to listen to music on their computers and download songs.

MusicNet will act as a wholesaler, licensing songs to other online providers, such as America Online and RealNetworks Inc., which also owns part of the service. Pressplay will sell directly to consumers through a variety of affiliates, including Yahoo Inc., Microsoft Corp.’s MSN and MP3.Com Inc.