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Vivendi/Mp3 Deal Seen Raising Regulatory Eyebrows
By Sue Zeidler

LOS ANGELES (Reuters) - Controversy and online music seem to go hand-in-hand and the next big showdown may be in Washington, where the recording industry's online tactics could come under fire from Congress and top-level regulators, experts said on Monday.

In a sign of how quickly the industry has shifted to embrace the Web, Vivendi Universal on Sunday said it would buy its one-time legal foe Web music company for $372 million to bolster its online business.

But having waged a legal battle against and other online start-ups for more than a year, the recording industry may now stand accused of having set out to control more of the Internet distribution business itself, a charge that could raise antitrust concerns, analysts said.

"Some companies believe legislators think the record industry's copyright battles were all about trying to control the space,"said Eric Scheirer, an analyst with Forrester Research.

"If you read the Vivendi/ deal through the lens that Universal pursued an aggressive lawsuit against, made it cheaper and then purchased it, you would think Congress may find this deal somewhat disturbing,"he said.

The Vivendi Universal move underscores how fast the music conglomerates are now moving to get their songs online after fighting tooth-and-nail against Web companies like song-swap company Napster and for copyright infringement.

With key legal victories against both under their belts, the big labels have entered into elaborate joint subscription ventures that split the industry into two rival camps: Universal's Duet joint venture with Sony Music and MusicNet -- a joint venture between RealNetworks and AOL Time Warner Inc., owner of Warner Music Group; and Bertelsmann AG, owner of BMG Entertainment and EMI Group Plc.


"The whole online distribution chain will have to be examined at some point. Pretty soon, there will be just two options for getting music on the Internet,"said Ken Freundlich, an entertainment attorney in Los Angeles.

"The reality is that there are a lot of arrangements being made and acquisitions which will probably raise some eyebrows from an antitrust regulatory point of view,"he said.

Like Vivendi Universal, many of the label giants are now scooping up smaller Web pioneers such as, which have plunged in value as a result of their litigation.

Control of the flow of music and music sales has long been a subject of government scrutiny, with regulators recently blocking proposed mergers between music giant EMI and AOL Warner and then EMI and Bertelsmann. Regulators have also launched CD price-fixing probes into the industry, both in the U.S. and in Europe.

At a Congressional hearing last week, Rep. Howard Berman, a California Democrat, raised a concern about the online distribution efforts of the conglomerates: "Is this going to end up as some sort of monopoly control, where the companies you own and partner with will be the only ones who can do this?"he asked Vivendi Universal vice chairman Edgar Bronfman at the hearing regarding online royalties.

Officials at the Securities and Exchange Commission and Justice Department declined comment on Monday.

After a federal court ruling against in April 2000, the San Diego-based company paid over $160 million to the five major labels -- Universal, Sony, BMG, Warner Music Group and EMI -- and music publishers. Universal Music refused to settle with and ultimately won a bigger judgement than the other labels.


In November, relaunched its controversial service, -- which lets users listen to their own CDs online from any computer -- with licenses from all the five labels.

Vivendi Universal said it had acquired these labels' licenses as part of its acquisition, which irked some competitors. "You have a potential where Vivendi can control pricing on everyone else's content through its own distribution channel,"said one online executive at another label.

"This deal is not only going to wake up Congress, but I expect several regulatory bodies like the Securities and Exchange Commission and the Department of Justice to take a look at this,"the executive said.

Musicians and music publishers have also raised concerns.

"Its disconcerting that we're finding the online distribution path is now being consolidated ... and controlled by five companies,"said Noah Stone, executive director for the Recording Artist Coalition, a trade group led by singer Don Henley. "I have no doubt that major labels will provide music online but we have to keep asking the question of how artists will be compensated.'' still has outstanding legal claims, but Vivendi Universal said it had taken the necessary measures to protect itself from any remaining legal risks."

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