[Federal Register Volume 66, Number 152 (Tuesday, August 7, 2001)]
[Notices]
[Pages 41238-41240]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19723]


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FEDERAL TRADE COMMISSION

[File No. 001 0231]


Warner Communications Inc.; Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: The consent agreement in this matter settles alleged 
violations of federal law prohibiting unfair or deceptive acts or 
practices or unfair methods of competition. The attached Analysis to 
Aid Public Comment describes both the allegations in the complaint that 
accompanies the consent agreement and the terms of the consent order--
embodied in the consent agreement--that would settle these allegations.

DATES: Comments must be received on or before August 30, 2001.

ADDRESSES: Comments should be directed to FTC/Office of the Secretary, 
Room 159, 600 Pennsylvania Ave., NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT: Joseph Simons or Geoffrey Green, FTC/
H-374, 600 Pennsylvania Ave., NW., Washington, DC 20580. (202) 326-3667 
or 326-2641.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Sec. 2.34 of the 
Commission's rules of practice (16 CFR 2.34), notice is hereby given 
that the above-captioned consent agreement containing a consent order 
to cease and desist, having been filed with and accepted by the 
Commission, has been placed on the public record for a period of thirty 
(30) days. The following Analysis to Aid Public Comment describes the 
terms of the consent agreement, and the allegations in the complaint. 
An electronic copy of the full text of the consent agreement package 
can be obtained from the FTC Home Page (for July 31, 2001), on the 
World Wide Web, at ``http://www.ftc.gov/os/2001/07/index.htm.'' A paper 
copy can be obtained from the FTC Public Reference Room, Room H-130, 
600 Pennsylvania Avenue, NW., Washington, DC 20580, either in person or 
by calling (202) 326-3627.
    Public comment is invited. Comments should be directed to: FTC/
Office of the Secretary, Room 159, 600 Pennsylvania Ave., NW., 
Washington, DC 20580. Two paper copies of each comment should be filed, 
and should be accompanied, if possible, by a 3\1/2\ inch diskette 
containing an electronic copy of the comment. Such comments or views 
will be considered by the Commission and will be available for 
inspection and copying at its principal office in accordance with 
Sec. 4.9(b)(6)(ii) of the Commission's rules of practice (16 CFR 
4.9(b)(6)(ii)).

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.
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    \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.
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    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.
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    \2\ The concert promoter is responsible for producing the master 
recordings.
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    The complaint alleges that in 1997, Warner Music Group and PolyGram 
Music Group agreed to collaborate in the distribution of audio and 
video

[[Page 41239]]

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 consumers.
    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 audio product.\3\
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    \3\ These Order provisions would also apply to video products 
that feature the Three Tenors. The proposed Order generally does not 
cover vertical restraints.
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    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 
procompetitive 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).
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    \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).
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    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.
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    \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).
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    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\
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    \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.
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    The Commission has reason to believe that this hypothetical 
scenario does not justify the restraints on competition alleged in the 
complaint. According to the compliant, 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

[[Page 41240]]

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.
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    \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 para. 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 ride.'').
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    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.

    By direction of the Commission.
Benjamin I. Berman,
Acting Secretary.

Statement of Commissioner Mozelle W. Thompson

Warner Communications Inc. File No. 001-0231

    As I said in my statement \1\ following the issuance of the 
Antitrust Guidelines for Collaborations Among Competitors,\2\ I believe 
that joint ventures can enable companies to expand into foreign 
markets, fund expensive innovation and research efforts, and lower 
costs to the benefit of industry and consumers alike. But an otherwise 
legitimate joint venture may not shield price fixing or any other form 
of anticompetitive restraint if the restraint is not both reasonably 
related to the venture and reasonably necessary to achieve the 
venture's procompetitive objectives. The Commission's complaint against 
Warner Communications and the accompanying consent order that we 
accepted for public comment today underscore this important principle 
of joint venture law.
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    \1\ http://www.ftc.gov/os/2000/04/antitrustguidethompson.htm
    \2\ The Federal Trade Commission and the U.S. Department of 
Justice issued the Guidelines in April 2000. http://www.ftc.gov/bc/guidelin.htm

[FR Doc. 01-19723 Filed 8-6-01; 8:45 am]
BILLING CODE 6750-01-M