Sony Sued Over CD Hyperlinks

The National Association of Recording Merchandisers is suing Sony Music Entertainment Inc. for placing hyperlinks on their audio compact discs that direct consumers away from retailers and into Sony’s online stores.

The lawsuit, which was filed Jan. 31 in the U. S. District Court for the District of Columbia, claims that “bundling” links within Sony products should be deemed illegal as it threatens retailers such as Tower Records, Compact Disc World and The Musicland Group, with erosion of their customer base.

“If a consumer goes into a record store this week and purchases a Ricky Martin CD and puts it in its CD-ROM drive, an icon and a hyperlink [that says ‘take me to’] will come up,” said Pamela Horovitz, president of NARM, Marlton, NJ. “On that Web site is a link to buy additional CDs that takes consumers directly to the online Sony Music store. It creates a playing field that’s not level.”

“It’s similar to a manufacturer putting a coupon in a CD asking the consumer to go to the store across the street,” said David Lang, president of Compact Disc World, South Plainfield, NJ. “That wouldn’t be fair, would it? That’s what it’s all about, we’re hoping Sony will do the fair thing.”

Sony Music was served the papers at press time.

“We can’t comment until we have fully reviewed the suit,” said a spokeswoman at Sony Music Entertainment Inc., a subsidiary of Sony Corp. of America, New York.

The validity of the case is difficult to evaluate, as a number of third-party lawyers contacted by iMarketing News labeled this a complicated anti-trust suit.

“It’s a novel argument,” said David H. Evans, an attorney with Arent, Fox, Kintner, Poltkin & Kahn, Washington. “I haven’t heard of a case like this before.”

At least one lawyer thinks the case will be dismissed. “NARM’s complaint seems to be asking the court to extend the antitrust laws well beyond their current boundaries,” said William Swiggart, managing partner at Swiggart & Agin, LLC, Boston. “The behavior complained of is analogous to the publisher of a paperback book, including in the back of the book a form whereby the reader may order copies of other books by the same author, or similar books, directly from the publisher, bypassing the retailer.

“The real problem for the NARM members seems to be that the Internet makes the order form provided by Sony tremendously more powerful than a paper order form because it is far easier for the consumer both to sample the similar product from the ECD, and to order a copy of it through a hyperlink. Unfortunately for NARM, the power of this arrangement presents a tremendous potential benefit to the consumer. It would, in my view, contravene the purpose of the antitrust laws to extend them in such a manner as to deny the consumer this benefit.”

In the meantime, retailers are left with little choice but to stock CDs with the links because Sony does not identify which discs contain the links and which don’t.

“The CDs that include hyperlinks are not identified to us. We are not given a choice whether we want to sell them or not,” said Lang. “We want to have the choice not to sell a product that takes the customer to a rival retailer. We don’t think that’s too much to ask.”

The suit is in many ways a preemptive strike as retailers fear that in the long run links on DVD audio and digital downloads as well as CDs could cause serious damage to their customer base. “It’s not just about CDs, it’s about the future of prerecorded entertainment,” said Lang.

The reason Sony was targeted was the fact that “they’ve got a combination of practices that casts the widest net that [encompasses] all of the concerns of retailers in one lawsuit.”

In addition to the hyperlinks, NARM has included the use of “blow-in” promotional inserts in the suit. These inserts, that are tucked in the CD jewel case, direct consumers to competitors and other related products and services owned or operated by Sony.

Additionally, the suit states that Sony’s actions are raising the barriers of entry for NARM members as well as raising costs to independent record companies because retailers will be forced to raise their margins to compensate with “Sony’s free riding and dilution of NARM retailers’ sales.”

In the end, retailers are not asking for the removal of the hyperlinks in total, just the ones that link to online stores.

“We’re not anti-consumer. We’re not trying to take away a consumer’s entertainment. The hyperlinks are great. They offer artist’s biographies, videos, hidden tracks,” said Lang. “It’s great for the consumer. We love selling them. We don’t love the hyperlinks [that sell Sony products].”

NARM is the non-profit trade association that represents more than 1,000 member companies engaged in music retailing, wholesaling and distribution.

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