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Ninety-six Idaho public libraries recently received shipments of free, music CDs. In the case of the larger libraries, the CDs numbered in the thousands. The impact of this gift has been considerable. Librarians around the state have been busy unpacking, inspecting, reviewing, cataloging and shelving CDs, and also wondering what they would do with all the CDs they didn't want. The gift had its origins in legal activity that began over three years ago. The Idaho Librarian felt that it would useful to tell the story behind the gift, and report on librarians' reactions to it.
The Editor

Legal History of the CD Price Fixing Case

It all began in the early 1990s when several large music CD producers and distributors noticed that discount retail stores were advertising and selling CDs as loss leaders. The stores, though they paid roughly $12 a piece for the CDs, were selling them at $9-10, just to bring in customers. The music companies, including EMI, BMG, Universal-Polygram, Sony and Time-Warner, who sell about 85% of the CDs in the United States, were concerned that this practice would lower the perceived value of CDs and eventually force a reduction in the retail price, and a loss of profits for them. At that time, it was estimated that the average cost of manufacturing a CD was $1.00. The royalties for the artists ranged from $1.00-$2.50 per CD; $8.50 to $10 went to the music companies. Retail stores generally added about $3 to the price, for themselves.(1)

The music companies devised a cooperative plan to deal with this alarming threat to their profits. The plan was called “MAP” and stood for “Manufacturer's Advertised Price.” It depended upon the existence of a traditional practice of music companies whereby they would provide retailers with extra money to pay for advertising. Retailers came to count on this subsidy. According to the MAP plan, CD producers and distributors would threaten to withdraw that subsidy if a retailer continued to advertise bargain prices for its CDs. Music companies did not insist that a retailer not sell the CDs at lower prices, only that it couldn’t advertise those prices, even within the store. Loss leader marketing, was, of course, impossible under these restrictions, so offending retailers eventually abandoned the practice and CDs returned to their former prices. It has been estimated that, between 1995 and 2000, American consumers paid half a billion dollars more for CDs than they might have if the music companies had not applied this pressure on retailers.(2)

Cooperativeness is a virtue that business competitors are not praised for exhibiting, at least not with one another. After studying the business practices of the music companies for several years, the Federal Trade Commission, in 2000, charged them with colluding to fix the prices of their products. The defendants negotiated a settlement, insisting that they had not been doing anything wrong, but promising to stop doing it anyway. Five weeks after the FTC settlement, a class action suit was brought against the producers and distributors by a customer in Massachusetts. (To be completely accurate, not only the five music companies, but also three large CD retailers were identified as part of the conspiracy and hence were defendants in both the FTC action and the class action suit. They were: Tower Records, Musicland Stores, and Transworld Entertainment Corporation.)

On July 9, 2003, the class action suit, which had been joined by the attorneys general of 40 states and tried in a Massachusetts federal court, finally resulted in a second “settlement,” which is to say that the parties negotiated an agreement without the defendants either admitting guilt or being found guilty. According to the settlement, the defendants agreed to pay a combination of cash and non-cash considerations: the combined cash payment was $67,375,000, the non-cash payment was $75,700,000, in the form of music compact discs.(3)

Because the settlement specified a dollar amount for the non-cash payment, the number of CDs distributed was determined by the monetary value of each. It appears that the dollar values of the CDs were assigned by the companies, not by the court.(4) It’s interesting that a price-fixing case should be resolved through a restitution in which the guilty party prescribes the value of the product it is required to return to the victims.

Idaho’s Share of the Spoils

Idaho, one of the states that had joined in the suit, eventually received notification of its portion of the payments. Cash payments were made to those who were fortunate enough to have heard about their eligibility, and were willing to go to the trouble of making claims. In Idaho, that was 15,500 people and they received about $215,000. The non-cash payment for the state consisted of some 25,000 music CDs, distributed in accordance with an agreement between the state, specifically the Idaho Attorney General’s Office, and the defendants.

Though these CDs were, in one sense, gifts, because they were free to the libraries, they were, in a legal sense, payments owed to the CD-buying public in Idaho from those who had cheated them. The music companies did not provide the CDs willingly, and, as we will see, they were hard negotiators on the details of the distribution agreement.

It was up to the Idaho Attorney General’s Office to come up with a proposal for the distribution of the CDs allotted to the state. I spoke with Brett DeLang, Lead Deputy Attorney General, who told me that his office received a complete list of the titles that had been chosen by the music companies for distribution, and the number of copies of each title. His office went over the list title-by-title in an effort to select those titles that would be desirable for patrons of Idaho libraries. Those libraries, on the whole, were not consulted on this selection, though there was consultation with the Idaho Library Association, according to Mr. DeLang and ILA President Vicki Kreimeyer, on the issue of duplicate copies.

The CDs were distributed to those public libraries in Idaho that showed interest in having them. No library received less than 25 CDs. The precise number sent was determined by the population of the library’s service area. A formula was used to produce a random selection of titles (and copies) for each library.

Mr. DeLang told me that the state anticipated the music companies’ tactic of trying to dump unwanted titles on the libraries, and sought to prevent this happening. Though he insisted that there was no copy of the actual agreement that specified the rules governing the distribution in Idaho that I could examine, he mentioned that his office stipulated that each popular music title to be distributed must have been on the Billboard list of top-ranked recordings for a certain number of weeks (apparently, the office did not require that the listing had occurred recently). They also tinkered with the formula used for distribution so that no library would receive more than fifteen copies of any given title. It was the problem of duplicate copies that led the Attorney General’s office to speak with the ILA when it noticed that Idaho Falls, for example, was slated to receive 200 copies of one title.

Credit is due the Attorney General’s Office for reducing the number of duplicate CD copies in Idaho shipments. Other states, such as Washington, failed to do so, with the consequence that the Puget Sound Educational Service District received 1,355 copies of Whitney Houston’s rendition of the "Star Spangled Banner." (5) (It may not be coincidental that the net proceeds of the sale of this CD were to go to the New York Firefighters 9/11 Disaster Relief Fund and the New York Fraternal Order of Police.(6) Could this have diminished the CD's distributor's incentive to keep this title in its warehouse?)

Who Bargained the Hardest? or, Maybe it is Better to Give than to Receive!

On the whole, despite our Attorney General’s efforts on behalf of Idaho, the music companies seem to have fared rather well in the settlement. The very fact that they were permitted to make restitution with “in kind” payment was obviously to their advantage. I doubt that there is a librarian in Idaho that would not have preferred to be given cash rather than CDs. The right to send vastly more copies of many titles than there were recipient libraries in the states further enhanced their ability to clean out unwanted inventory.

Additionally, the settlement permitted the music companies to attach strings to the “gift”. If libraries sell all the CDs they don’t want, the proceeds must be used to buy more CDs, thus returning money to the companies. Moreover, according to Mr. DeLang, libraries are not permitted to simply discard any of the CDs that they received. What, then, are they to do with them? Mr. DeLang responded that unwanted CDs can be sent to his office (the address of which, by the way, is 700 West Jefferson Street, Box 83720, Boise, Idaho, 83720) I asked Mr. DeLang if the Attorney General has plans to enforce these terms of the settlement. He said no plans were currently being developed.

Neither has his office any plans to help libraries deal with the hundreds of duplicate CDs they now possess. Fortunately, libraries themselves are taking action. The Library Consortium of Eastern Idaho, for example, will be exchanging CDs at a meeting on September 2^nd , in Pocatello. Elaine Leppert, of Caldwell Public, tells me that CD trading will probably be on the agenda of the meeting of their regional association (SWIRL), also in September. How successful these efforts will be remains to be seen. One hopes that the larger libraries will be willing to simply give away some of those duplicates to the smaller ones who did not receive them.

Reactions of Idaho Librarians

I solicited reactions from libraries that received CD shipments. Fifteen were kind enough to respond. With regard to the “appeal” of the CDs they received, most respondents rated it as moderate or low. The percentage of each shipment that consisted of duplicate copies varied widely. The biggest loser of those that responded was the Meridian district; they received 1117 CDs and 783 of them (70%) were duplicates. Four libraries reported duplication rates of 40-54%, three 20-25%, four 12% or less. There seemed to be no real correlation between the size of the shipment and the percentage of duplicates.

Librarians chose some interesting titles to comment upon. Kimberly Public Library remarked that opera titles “will not be used here.” The Martha Stewart Halloween sound effects CD (widely cited in the national press) was mentioned by several libraries. At Midvale Community Library the CD “Big Punisher” caused a double-take. Elaine Leppert, of Caldwell Public Library, reported “The Monks of Silos” as perhaps her most absurd CD, and she got 15 copies of it. Rena Ferguson of Idaho Falls Public Library was intrigued by “Wrestlemania: the album”.

A majority of the librarians felt that the music companies had committed at least some “dumping”, insofar as few titles were currently popular or by “hot” artists and there were many “one-hit wonders” and obscure performers and composers. Overall, however, it seemed to be the existence of the duplicates which most annoyed people and made the “dumping” charge plausible. Whatever credit may be due our state’s Attorney General for seeing to it that no library got more than 15 of any given title, for most libraries that was 14 too many. And it is doubly galling that each of those 14 extra copies, which the libraries must now figure out what to do with, counted as a $10-20 payment against the debt owed to the CD-buying public by the music companies.

Some may think it churlish to complain about the CD gift. The old adage has it that one must never look a gift horse in the mouth. Yet, in an important sense, this was not a gift but a quid pro quo. A more appropriate piece of advice might be: make sure that the horse that's delivered is the same one you've already paid for.