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Issue Date: Vol. 44, No. 5, May 2004, Posted On: 5/7/2004


Shhh! It's A Secret


Marcus Webb

The two most compelling stories in the industry today are the ones nobody wants to discuss on the record. Which is not unusual. But when half a dozen respected, well-connected sources confirm the same basic facts, it's no longer rumor. It's just a damned interesting story'that nobody wants to talk about.

Both stories have to do with big companies possibly consolidating their hold on a growing portion of the market. Since none of our sources will go on the record, we've decided to deal with these stories here, on the editorial page, without names. We - and many of our sources , believe these stories should be discussed openly for the good of the industry.

Story number one: reliable sources have informed us that several leading distributors wish to invest in a broadband entertainment entity that will supply music and possibly other downloaded content (video games, tournament promotions, etc.) to operators.

Some operators, manufacturers and distributors have told us: "If you think operators are concerned about manufacturers having the operator's proprietary information'the addresses of their best locations and precise counts of how much money each machine earns'what do you think will happen when operators are confronted with a distributor that has this kind of information? Especially a distributor that operates or wants to operate. Operators will go ballistic."

Perhaps, but then again, perhaps not. Others (who are not distributors) have said: "I think it would be great if distributors owned part of the broadband network. I am not worried about distributors trying to operate. The fact is, most of the country's biggest operators are not distributors. If operators face a choice of having all that sensitive data in the hands of distributors or in the hands of manufacturers, I say trust the distributors. Besides, getting distribution involved in hi-tech infrastructure ensures their role in the Information Age. And it puts distribution solidly back in the middle of a three-tier structure that has served this industry well."

Who's right? It's too early to say. But the industry can't have a thoughtful discussion about this issue until the facts are on the table.

Story number two concerns a leading manufacturer that asked its distributors to sign contracts giving the distributors price breaks for volume purchases, but restricting the distributors to selling only 5% of competitors' products. (Asked about this, a spokesman for the manufacturer stated: "I can neither confirm nor deny that report.")

Understandably, competing manufacturers strongly dislike this idea. Some have complained about possible anti-trust or restraint-of-trade violations. Other competitors have grudgingly admitted the deal, while unappetizing, probably is perfectly legal. Some distributors have said in theory they see nothing wrong with the proposal, but would expect some reciprocation from the manufacturer.

In this case, oddly enough, the manufacturer is not promising that distributors will be the sole representatives of the line in their respective territories. And, distributors have been told they will have to confine their sales of the manufacturers' products within the distributors' local geographic regions. At press time, we are reliably informed that no distributors have signed these contracts.

Anti-trust law is a complex field. Many conflicting precedents have been set in different jurisdictions regarding different industries. And, enforcement of anti-trust law tends to vary from one U.S. attorney general to the next, and from one era to the next. But the amusement machine industry heard no complaints when, say, a leading jukebox company told its distributors: "If you sell our downloading machine, you can't sell anybody else's." In other words, distributors were held to 0% of competing products. By comparison, 5% seems generous.

The real issues here may be long-term questions. What happens if the manufacturer achieves some version of its restrictive distributor contracts, then merges with additional leading companies that make different "must have" amusement products? How much control over the industry is it healthy for a single entity to have?

Let the debate begin.

Topic: Editorial: Music and Games

Articles:
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  • Churn, Baby, Churn. Declining Dynamism In Larger Economy
  • Lessons Learned From The Life Of The Mad Mogul Felix Dennis
  • Can Operators Cash In On Heavy Summer Traffic?

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