The Three Tenors Antitrust Case: What Did We Learn?

Abstract

IntroductionOne of the unforeseen aspects of the Three Tenors legacy is that the franchise has been elevated to star status in the U.S. antitrust community (Verscheiden 2007). This group of legal boffins is a niche audience admittedly, but the enthusiasm of their analysis has been noteworthy. The Three Tenors case has been extolled as an important development, clarifying the way certain legal principles will be applied in examining anticompetitive behavior in a joint venture context, with implications for future cases (McChesney 2004; Meyer 2010; Verscheiden 2007). But of what relevance is this to managers working in music organizations?This article will provide the background to the Three Tenors case, summarize the court case, the ruling of the Federal Trade Commission (hereafter referred to as the FTC), the backlash that ensued from lawyers and law professors, the 2005 appeal, and the backlash to the appeal decision. It will then provide some organizational analysis to look more deeply at how the problems arose, before turning finally to what can be learned from the case and its practical implications for music and entertainment managers.Unless stated otherwise, the facts of the case as outlined below are drawn from the Initial Decision (Public Record Version), published by James P. Timony, Administrative Law Judge on June 20, 2002, which is in the public domain and available online (FTC 2002). While Warner and PolyGram were both involved in the antitrust saga, they were treated as separate cases by the FTC, and this analysis focuses on the PolyGram case. The record label Decca also appears in the case. Decca was owned by PolyGram, and was the repertoire center, or location-specific-creativeunit (Bakker 2006, 92) responsible for the Three Tenors recordings within PolyGram at the time of the case. Decca, based in London, distributed its recordings through PolyGram operating companies, each responsible for sales in a given country. In the 1990s Decca's recordings were marketed in the U.S.A. under the label London Records, and its catalog assets are now owned by the Universal Music Group.BackgroundThe first Three Tenors concert took place on July 7,1990 at the Baths of Caracalla in Rome. The concert united Jose Carreras, Placido Domingo, and Luciano Pavarotti for the first time. The event coincided with the 1990 FIFA World Cup, launching a tradition that was repeated for future World Cups. PolyGram recorded the concert and it became the most successful classical recording of its era, selling more than twelve million audio units and over three million video units (FTC 2002). This first Three Tenors album was referred to in the legal case as 3T1 (and will be henceforth referred to as 3T1).The Three Tenors (Carreras, Domingo, and Pavarotti) united four years later for a concert on July 16, 1994 at Dodger Stadium in Los Angeles. This concert was recorded by Warner, and is referred to in the legal case as 3T2.The third Three Tenors recording in the case was of an open-air concert in Paris that took place in front of the Eiffel Tower on July 10, 1998. In the spring of 1997 Ahmet Ertegun, the Chairman of Atlantic (a Warner subsidiary based in the U.S.A.), had met with Alain Levy, his counterpart at PolyGram requesting that Pavarotti (who was under exclusive contract to PolyGram) be released to record the project for Warner. Rather than release him (in return for certain considerations), PolyGram proposed that the two organizations create a joint venture agreement. The ensuing joint venture (hereafter referred to as JV) involved Warner distributing the recordings within the U.S.A. and PolyGram distributing them outside of the U.S.A. The parties agreed to a 50/50 split of profits and losses. An US$18 million advance was paid, ultimately shared between the parties, which also included the rights to market a greatest hits compilation and a box set. This third Three Tenors recording was released on August 18,1998 (and in addition to audio products included video and home television broadcast). …