U.k. Record Industry Faces New Gov't Probe

Coming off its third consecutive year of growth, the U.K. record business is now faced with considerable costs in time and resources in defending itself against a new government probe.

Industry lawyers, financial directors, and chief executives will be preoccupied with the Office of Fair Trading's (OFT) inquiry into the supply of CDs. Announced Feb. 9, the investigation is expected to take up to six months and is the second comparable probe launched by the OFT since 1992.

"It is difficult to imagine a product other than compact discs for which there has been greater scrutiny of market characteristics during the last 10 years," declared trade group the British Phonographic Industry (BPI) in response to the announcement of the inquiry.

At the heart of the probe is the allegation that seven U.K. companies—BMG, EMI, Sony, Universal, Virgin, Warner, and the country's largest independent record distributor, Pinnacle—colluded to discriminate against retailers trying to bring cheaper CDs into the country from European Union nations. The companies face potential fines of hundreds of millions of pounds. The OFT has the power to impose penalties of up to 10% of U.K. sales for every year of the infringement, for a maximum of three years.

In its Feb. 9 statement, the OFT said it has "reasonable grounds for suspecting that the record companies had taken concerted action to limit the parallel importing of CDs into the U.K. from other [European Union] member states."

The probe was announced less than two weeks after the European Commission (EC) launched an investigation into CD-pricing practices in Europe.

An OFT spokeswoman told Billboard that the U.K. inquiry was not linked to the EC probe but was launched after a number of complaints. She declined to say where the complaints originated.

However, it is known that at least one major British supermarket chain is unhappy about record companies' augmenting U.K. albums with material not available on equivalent continental European product. (The strength of the British currency in recent years has attracted legal EU imports into the U.K., just as in previous years when the currency was weaker, exports from Britain traveled in the other direction.)

Critics of the "extra tracks" strategy claim that it increases the risk for retailers to buy cheaper Continental imports, for fear that consumers will want the albums with the additional material. U.K. supermarket chains such as Sainsbury's, Tesco, and Wal-Mart-owned Asda are taking an increasing share of the domestic music market and using low CD prices to lure customers.

The OFT enquiry will center on the Competition Act 1998, which "bans activities that stifle competition such as cartels, concerted practices, and abusing a dominant position in the market." The OFT explains, "Concerted practice is cooperation between two or more undertakings which stops short of a formal agreement."

The BPI's official response was that the U.K. music business "is and always has been fiercely competitive. It is one of the reasons that this country has excelled on the world music stage. This is widely acknowledged and was recognized by the [Monopolies and Mergers Committee (MMC)] in its 1994 report."

It was an OFT referral that prompted that MMC probe; at approximately the same time, there was a parliamentary investigation into CD prices.

"The worst thing about [the MMC inquiry] was that the whole industry marked time," former BPI director general John Deacon told Billboard last year. "And the public's perception was that CD prices were actually too high, because there was a committee of enquiry going on . . . The interesting thing is that once we were cleared, CD sales in the U.K. suddenly took off."

Deacon also suggested that the MMC enquiry led to the record industry's organizing and improving its lobbying of, and communication channels to, the government. For this reason, the industry's current leaders will be disappointed in the OFT action and may reflect that the 1999 fragmentation of the country's record companies into two trade groups—the BPI and the Assn. for Independent Music—has allowed the government to embark on this anti-industry initiative.

Those same leaders also know that with the incumbent Labour government expected to call an election this year, a probe into CD prices has a certain appeal to voters.

A spokesman for market-leading Universal Music U.K. says, "[We] have received a formal notice requesting information from the Office of Fair Trading. We are complying with the request and have nothing further to add at this stage."

Pinnacle Records managing director Tony Powell says, "We are surprised to have been contacted in connection with this inquiry. As being only a distributor of third-party records, we have no control over the pricing of records or the type of release format. However, we will fully cooperate with the OFT."

An EMI spokesman says, "We have received a request for information from the OFT. Obviously we will be cooperating, but we cannot comment any further at this time."

Sony, BMG, and Warner had no comment. The seven companies have until Feb. 23 to submit responses to the OFT.

Simon Wright, chairman of the British Assn. of Record Dealers, was not available for comment.