The Federal Trade Commission and the five major music distributors have reached settlements which will end what the FTC alleged were illegal advertising policies that inflated the price of CDs. Though the FTC estimates that U.S. consumers may have paid up to $480 million more than they should have for recorded music over the last three years, the companies won't pay any penalties, and they didn't admit to any wrongdoing.

At a Wednesday (5/10) news conference, FTC Chairman Robert Pitofsky said that CD prices could fall $2 to $5 per disc as a result of the settlements.

The FTC charged that Universal Music and Video Distribution, Sony Corp. of America, Time-Warner Inc., EMI Music Distribution and Bertlesmann Music Group--conglomerates which account for about 85% of all CDs purchased in the United States--illegally required retailers to advertise CDs at or above a "Minimum Advertised Price" set by the distribution companies. The retailers that didn't comply with the distributors' MAP risked losing their cooperative advertising payments, which would have cost the biggest retailers millions of dollars each year, according to the FTC.

The FTC alleged that in the early 1990s, many new music retailers--including major consumer electronics stores--started to sell CDs at low prices to gain customers and market share. To compete, traditional retailers also lowered their prices. The ensuing price war caused the prices of popular CDs to fall to as low as $9.99.

According to the FTC, the distribution companies adopted the "unlawful" MAP policies in 1995 and 1996 to stop the price erosion, and the move quickly put an end to the CD price war.

Under the settlements, the five major distributors will agree to stop linking promotional funds to the advertised prices of retailers for the next seven years. For 13 years after that, the companies will be prohibited from conditioning promotional money on the prices contained in advertisements they do not pay for. The agreements also prohibit the companies from ending relationships with a retailer based on its prices.