ANALYSIS OF PROPOSED CONSENT ORDER
TO AID PUBLIC COMMENT
The Federal Trade Commission has accepted, subject to final approval, an agreement
containing a proposed Consent Order from Warner Communications Inc. ("Warner").
Warner is a subsidiary of AOL Time Warner Inc., and has its principal place of business in
New York, New York.
The proposed Consent Order has been placed on the public record for thirty (30) days
for reception of comments by interested persons. Comments received during this period will
become part of the public record. After thirty (30) days, the Commission will again review
the agreement and the comments received, and decide whether it should withdraw from the
agreement or make final the agreement's proposed Order.
The Commission has not held an evidentiary hearing concerning the complaint. By
accepting this agreement, the Commission is affirming only that it has reason to believe
that the allegations in the complaint are well-founded.
The Commission's complaint charges that Warner has violated Section 5 of the Federal
Trade Commission Act by agreeing with certain subsidiaries of Vivendi Universal S.A. (the
"Universal Respondents") to fix prices and to forgo advertising. According to
the Commission's complaint, the Universal Respondents are the successor firms to PolyGram
Music Group.(1) The Universal Respondents have not signed
an agreement containing a proposed consent order, and hence the Commission's antitrust
claims against the Universal Respondents will be addressed in an administrative trial.
The alleged conspiracy involves audio and video products featuring the renowned opera
singers Luciano Pavarotti, Placido Domingo, and Jose Carreras -- known collectively as The
Three Tenors. Beginning in 1990, The Three Tenors have come together every four years at
the site of the World Cup soccer finals for a combination live concert and recording
session. According to the complaint, prior to each performance, the concert promoter
selects one (or more) of the major music/video distribution companies to distribute
compact discs, cassettes, videocassettes, and videodiscs derived from the master
recordings.(2) Distribution rights to the original 1990
Three Tenors performance, entitled The Three Tenors, were acquired by PolyGram
Music Group. Distribution rights to the follow-up performance, The Three Tenors in
Concert 1994, were acquired by Warner Music Group.
The complaint alleges that in 1997, Warner Music Group and PolyGram Music Group agreed
to collaborate in the distribution of audio and video products derived from the next Three
Tenors World Cup concert, scheduled for Paris on July 10, 1998. The parties agreed that
Warner Music Group would distribute the 1998 releases in the United States; that PolyGram
Music Group would distribute the 1998 releases outside of the United States; and that the
firms would share all costs, profits, and losses on a 50/50 basis. The complaint does not
challenge the formation or basic structure of the Warner/PolyGram joint venture.
According to the complaint, as the concert approached, Warner Music Group and PolyGram
Music Group became concerned that the audio and video products that would be derived from
the Paris concert would not be as original or as commercially appealing as the earlier
Three Tenors releases. In order to reduce competition from these earlier releases, Warner
Music Group and PolyGram Music Group adopted what they called a "moratorium"
agreement. PolyGram Music Group agreed not to discount and not to advertise the 1990 Three
Tenors album and video during a designated time period (from August 1, 1998 through
October 15, 1998). In return, Warner Music Group agreed not to discount and not to
advertise the 1994 Three Tenors album and video during the same interval.
According to the complaint, the third Three Tenors album and video, both entitled The
Three Tenors -- Paris 1998, were released on August 18, 1998, and were distributed in
the United States by Warner Music Group. During the moratorium period, PolyGram Music
Group refrained from discounting or advertising the 1990 Three Tenors album and video.
During this period, Warner Music Group likewise refrained from discounting or advertising
the 1994 Three Tenors album and video.
Finally, the complaint alleges that the moratorium agreement was not reasonably
necessary to the formation or to the efficient operation of the joint venture between
Warner Music Group and PolyGram Music Group. Rather, the effect of the moratorium
agreement was to restrain competition unreasonably, to increase prices, and to injure
Warner has signed a consent agreement containing the proposed Consent Order. The
proposed Consent Order would prohibit Warner from: (i) agreeing with a competitor to fix,
raise, or stabilize prices for any audio product, or (ii) agreeing with a competitor to
prohibit, restrict, or limit truthful, non-deceptive advertising and promotion for any
The Federal Trade Commission is aware that there is a great deal of collaborative
activity among companies in the music industry (e.g., joint ventures,
intellectual property licenses, sharing of artist rights and compositions). The proposed
Consent Order re-affirms the Commission's view that participation in a joint venture is
often pro-competitive, but that it is not a blanket excuse for price fixing or other
serious restraints on competition. In this regard, The Antitrust Guidelines for
Collaborations Among Competitors, issued by the Federal Trade Commission and the U.S.
Department of Justice in April 2000, should not be read to suggest that all agreements
"related to" a joint venture will be analyzed under the full rule of reason.
There are, however, situations in which horizontal restraints on price competition and
advertising are permissible. Thus, the proposed Consent Order contains exceptions to the
above-described prohibitions that are intended to permit Warner to engage in certain
lawful and pro-competitive conduct. First, when Warner and a competing seller jointly
produce a new audio product, the Order does not bar the firms from jointly setting the
selling price and jointly directing the advertising campaign for that product. See
Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979).(4)
Second, when Warner and a competing seller enter into a legitimate joint venture
agreement, the order does not bar the firms from entering into ancillary restraints both
reasonably related to the venture and reasonably necessary to achieve the pro-competitive
benefits of the venture. See NCAA v. Board of Regents, 468 U.S. 85 (1984);
Massachusetts Board of Registration in Optometry, 110 F.T.C. 549 (1988).
The Commission's complaint alleges that the Warner/PolyGram moratorium agreement was
not a lawful restraint on competition. Of critical importance is the allegation that the
parties' restrictions on competitive activity were not limited to jointly produced
products. Instead, the complaint charges that Warner Music Group and PolyGram Music Group
agreed to fix the prices of the pre-existing Three Tenors releases -- products that were
separately produced and separately distributed. Restraints that operate on products
outside of a joint venture will be scrutinized by the Commission with great care,(5) particularly if the restraints are directed at price. Here
the Commission has reason to believe that the alleged agreement between Warner and
PolyGram is not reasonably related to the joint venture or reasonably necessary to achieve
procompetitive benefits of the joint venture and is therefore per se unlawful.
One specific question involved in this proceeding is whether the moratorium agreement
was reasonably necessary in order to address a free-rider problem.(6)
Suppose, hypothetically, that Warner Music Group's investment in advertising the 1998
Three Tenors album in the United States brings consumers into the record stores. Suppose
further that many such consumers then opt to purchase, at a lower price, the 1990 album
distributed by PolyGram Music Group. The result may be that PolyGram Music Group benefits
from Warner Music Group's investment, leaving Warner Music Group (arguably) with less
incentive to invest resources in promoting the 1998 Three Tenors album.(7)
The Commission has reason to believe that this hypothetical scenario does not justify
the restraints on competition alleged in the complaint. According to the complaint, Warner
Music Group and PolyGram Music Group agreed to share the cost of advertising the 1998
Three Tenors album. It follows that, with regard to such advertising, PolyGram Music Group
need not be characterized as a free rider. In the words of Judge Easterbrook:
"Free-riding is the diversion of value from a business rival's efforts without
payment . . . . When payment is possible, free-riding is not a problem because the 'ride'
is not free." Chicago Pro. Sports Ltd. Partnership v. NBA, 961 F.2d 667, 675
(7th Cir.), cert. denied, 506 U.S. 954 (1992).(8)
More generally, when faced with a potential free-rider problem, firms should consider
whether there are practical, less-restrictive alternatives than price-fixing.
The proposed Consent Order includes a third proviso that is designed to ensure that the
Order does not impede Warner's ability to participate in industry efforts to discourage
the promotion of violent or otherwise inappropriate audio and video products to children.
Although Warner is generally prohibited from agreeing with a competitor to restrict
truthful and non-deceptive advertising, Warner is expressly permitted under the Order to
join with other sellers to prevent the advertising, marketing or sale to children of audio
products or video products labeled or rated with a parental advisory or cautionary
statement as to content.
The purpose of this analysis is to facilitate public comment on the proposed Order, and
it is not intended to constitute an official interpretation of the agreement and proposed
Order or to modify in any way its terms.
1. PolyGram N.V. was acquired by The Seagram Company Ltd. in
1998. Two years later, The Seagram Company Ltd. merged with Vivendi S.A. and Canal Plus
S.A. to form Vivendi Universal S.A.
2. The concert promoter is responsible for producing the
3. These Order provisions would also apply to video products
that feature the Three Tenors. The proposed Order generally does not cover vertical
4. In order to fall within this proviso, the collaborating
parties must each contribute significant assets toward production of the audio product so
as to achieve pro-competitive benefits. Sham collaborations will not shield an agreement
on price. Cf. Palmer v. BRG of Georgia, Inc., 498 U.S. 46 (1990).
5. See General Motors Corp., 103 F.T.C. 374 (1984)
(consent order) (manufacturing joint venture between General Motors and Toyota approved by
the Commission, subject to conditions aimed at reducing the likelihood of collusion
between the competitors with regard to both joint venture products and products outside
the joint venture).
6. See Chicago Pro. Sports Ltd. Partnership v. NBA,
961 F.2d 667, 674 (7th Cir.), cert. denied, 506 U.S. 954 (1992):
It costs money to make a product attractive against other contenders for
consumers' favor. Firms that take advantage of costly efforts without paying for them,
that reap where they have not sown, reduce the payoff that the firms making the investment
receive. This makes investments in design and distribution of products less attractive, to
the ultimate detriment of consumers. Control of free-riding is accordingly an accepted
justification for cooperation.
7. Note that this is a hypothetical example. It is not
apparent, inter alia, that an advertising campaign promoting the 1998 Three
Tenors album would necessarily lead a significant number of consumers to purchase the 1990
Three Tenors album.
8. Accord High Technology Careers v. San Jose Mercury
News, 996 F.2d 987, 992 (9th Cir. 1993); Toys R Us, Inc. ___
F.T.C. ___ (1998), 1998 FTC LEXIS 119, 131-35 (1998), aff'd, 221 F.3d 928, 938 (7th
Cir. 2000); H. Hovenkamp, XIII Antitrust Law at 334 ¶ 2223b (1999)
("[F]ree rider defenses should be rejected when the firm that controls the input is
able to sell, rather than give away, the good or service that is subject to the free