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Guitar Center/NAMM Accused of Price Fixing


Will Chen

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This topic is generating a little buzz in the guitar forum and I though you all might be interested as well. These are quotes from my blog with direct links back to the source material.

Per a September 23, 2009 press release, Hagens Berman Sobol Shapiro LLP has filed a class action lawsuit on September 22, 2009 in U.S. District Court in California against Guitar Center and the National Association of Music Merchants (NAMM) claiming the two conspired to fix retail pricing on fretted instruments including guitars, allowing national music-retail heavyweight Guitar Center to secure higher profits and stamp out competition at the expense of consumers.

You can read the press release in it's entirety here including a link for those potentially interested in participating in the lawsuit.
NAMM's response:

In a September 24, 2009 press release, NAMM (National Association of Music Merchants) has responded to the Hagens Berman Sobol Shapiro LLP class action lawsuit which has been reprinted in part below.

"NAMM believes that the recent lawsuits filed by plaintiffs making antitrust claims against the association are without any merit and reflect an incorrect understanding of the consent agreement that NAMM entered into with the FTC in March of this year...These types of legal actions based on misinformation...are a detriment to the music industry, to music makers and to music lovers everywhere. While NAMM is understandably disappointed that these groundless lawsuits have been filed, the association does have a legal strategy in place to defend and protect itself against these claims."

The consent agreement referred to is the March 4th, 2009 cease and desist order prohibiting NAMM from

"...acting directly or indirectly, or through any corporate or other device, in or affecting commerce, as
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Here's a perspective courtesy of Music Trades Magazine that may give you some insight...

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MONTHS AFTER THE FTC CAME UP EMPTY-HANDED in its investigation into alleged industry price fixing, a civil suit has been filed making similar allegations. Guitar Center, Fender Musical Instruments, and NAMM stand accused in a class action suit of working in concert to "artificially inflate" the price of guitars and deprive consumers of choice. David Giambusso, a Brooklyn resident who bought an instrument from Guitar Center in September 2007, says he paid too much, and the suit seeks $5 million in damages for him and everyone else who purchased a fretted instrument or accessory between January 1, 2005, and December 31, 2007. Giambusso is represented by Mark Tamblyn of Wexler & Wallace. A lead attorney for the full class of plaintiffs has yet to be announced.

Although Guitar Center, Fender, and NAMM are the only parties named in the suit, the complaint alleges that other "unnamed" enterprises were likely to have participated in the conspiracy. Lawyers say they will uncover these other parties through the discovery process and take appropriate action.

In an error-filled complaint, filed in Sacramento, California on September 11, 2009, attorneys paint a picture of three immensely powerful entities--NAMM, Guitar Center, and Fender--working closely together to force up prices and exclude low-priced products from the marketplace. Fender, as the "largest guitar company" in the United States, is said to have used its market clout in unspecified ways to prevent potential competitors from "competing effectively against the defendants." Guitar Center, by virtue of its size and national reach, is said to have achieved near "monopoly power," which it has used to keep lower-priced products out of the marketplace. NAMM, which includes most of the industry's suppliers and retailers as members, stands accused of urging its membership to raise prices to fatten the bottom lines at Fender and Guitar Center. To bolster this claim, the complaint cites the recently concluded FTC investigation, which expressed concern that certain NAMM-sponsored meetings could encourage price fixing.

As proof of this alleged conspiracy, lawyers cite average selling prices from The Music Trades Industry Census. However, the numbers cited bear no relation to the actual published data. The complaint states, "According to The Music Trades Annual Census of the Music Industry, published in 2009, in 2006 the average price of a guitar was $309, by 2007 the average price was $350, and by 2008 the average price was $372." The actual numbers published in The Music Trades show no such increases. We reported that the average selling price of a guitar in 2006 was $372; it increased to $389 in 2007 and then retreated to $375 in 2008.

In other notable errors, the complaint references 80,000-square-foot Guitar Center stores stocking 4,500 SKUs, when the company reports store sizes of between 15,000 and 25,000 square feet, and an average 11,000 SKU count. The complaint also claims that Best Buy is opening 91,250-square-foot music stores, when the actual size is approximately 2,000 square feet.

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Quote Originally Posted by Jon Gnash

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Just curious. Does anyone disagree with that?

 

I'm not sure what "near monopoly power" means, legally. I have a lot of different music stores to choose from around here, including GC as well as Sam Ash, a good number of smaller one-location shops, and the real giant of the business, mail order and e-commerce places like Sweetwater and Musicians Friend. So I'm not even sure what a "near monopoly" is or how it applies to this suit.
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Wouldn't "price-fixing" have to be done in such a way as to be anti-competitive? I think that gear prices are excessively manipulated, but there are so many choices in the market among manufacturers, retail outlets, mail order houses - where is the anti-competitive damage?

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If they really wanted to do something useful they should go after the practice of MAP (Minimum Advertised Pricing) which doesn't allow pricing competion in any published prices. This is why when you do an Internet search for a product everyone has the same price listed (usually). The typical consumer thinks he is getting a "deal" by ordering over the Internet, when, in fact a better deal can be had by calling those same dealers directly and asking for a better price. So long as they don't print the price that they will sell at in an advertisement all is well with them and their suppliers. If they print a price in an ad lower than MAP then they will potentially be in trouble with their supplier. Many years ago "Fair Trade" pricing was standard with many manufacturers in the home electronics industry. This is similar to MAP and was done away with in the mid '80's.

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Quote Originally Posted by Jeff da Weasel View Post
I'm not sure what "near monopoly power" means, legally. I have a lot of different music stores to choose from around here, including GC as well as Sam Ash, a good number of smaller one-location shops, and the real giant of the business, mail order and e-commerce places like Sweetwater and Musicians Friend. So I'm not even sure what a "near monopoly" is or how it applies to this suit.
The fact that you mentioned GC and Musicians Friend as competitors when they are in fact arms of the same conglomerate kinda proves the point. GC, Musicians Friend, Music123, Musician, Woodwind Brasswind, Music & Arts, and I'm sure a few more I've forgotten are all part of the same company. Around DFW, they probably have more than 50% of the brick and mortar market share.

Quote Originally Posted by Billster View Post
Wouldn't "price-fixing" have to be done in such a way as to be anti-competitive? I think that gear prices are excessively manipulated, but there are so many choices in the market among manufacturers, retail outlets, mail order houses - where is the anti-competitive damage?
That is what the MAP, minimum advertised price, argument is all about. If the retailers and distributors all agree to a specific price point then the industry is controlling the price rather than the open market. So I as the consumer suffer as I'm paying an artificially inflated price for goods/services. Combine this with the volume discounts afforded to GC which they then turn around and sell at "prices too low to print" even undercutting the independent's wholesale price and you have an extremely uncompetitive marketplace.
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I don't know about being anti-competitive, but I no longer shop at Guitar Center since they abandoned the practice of wheeling and dealing. I used to be able to go to a GC and get a lower price than elsewhere through negotiation, but no more.
Now, GC sells stuff only at the MAP unless you bring in evidence of a lower price elsewhere, which doesn't really exist because everyone uses the MAP. So, now it doesn't even matter much where I buy stuff, so GC loses my business.

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Quote Originally Posted by Billster View Post
Wouldn't "price-fixing" have to be done in such a way as to be anti-competitive? I think that gear prices are excessively manipulated, but there are so many choices in the market among manufacturers, retail outlets, mail order houses - where is the anti-competitive damage?
Note that the lawsuit concerns fretted instruments. And most people want to play a fretted instrument before they buy it.

Do
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Quote Originally Posted by Will Chen View Post

The fact that you mentioned GC and Musicians Friend as competitors when they are in fact arms of the same conglomerate kinda proves the point. GC, Musicians Friend, Music123, Musician, Woodwind Brasswind, Music & Arts, and I'm sure a few more I've forgotten are all part of the same company. Around DFW, they probably have more than 50% of the brick and mortar market share.
Bingo. We have a winner. thumb.gif

Also - how many brand names (of gear) are actually owned by GC?

Obviously they don
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Quote Originally Posted by Will Chen View Post
The fact that you mentioned GC and Musicians Friend as competitors when they are in fact arms of the same conglomerate kinda proves the point. GC, Musicians Friend, Music123, Musician, Woodwind Brasswind, Music & Arts, and I'm sure a few more I've forgotten are all part of the same company. Around DFW, they probably have more than 50% of the brick and mortar market share.
Zowie -- is that true? I had no idea these were under one ownership. Who is the parent company that owns all of these?
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Quote Originally Posted by Will Chen

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That is what the MAP, minimum advertised price, argument is all about. If the retailers and distributors all agree to a specific price point then the industry is controlling the price rather than the open market. So I as the consumer suffer as I'm paying an artificially inflated price for goods/services. Combine this with the volume discounts afforded to GC which they then turn around and sell at "prices too low to print" even undercutting the independent's wholesale price and you have an extremely uncompetitive marketplace.

 

Even with the MAP, my point is that there are many choices. If you feel like the Fender stuff is overpriced, there are plenty of other manufacturers at various price points, plus the used market. It's similar to the car selling business in that way. I don't like the list price/MAP deal because it's inherently silly. They don't sell refrigerators that way.
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Quote Originally Posted by Jeff da Weasel

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I'm not sure what "near monopoly power" means, legally. I have a lot of different music stores to choose from around here, including GC as well as Sam Ash, a good number of smaller one-location shops, and the real giant of the business, mail order and e-commerce places like Sweetwater and Musicians Friend. So I'm not even sure what a "near monopoly" is or how it applies to this suit.

 

They pretty much put everything near me out of business or close to it.
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Quote Originally Posted by Jon Gnash View Post
Just curious. Does anyone disagree with that?
They're certainly only one (well two) stores of many in Austin. Independent stores are large and still very competitive here.

On the web, I guess there's Zzounds, right? Or did Guitar Center buy them too?

Terry D.
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Quote Originally Posted by Will Chen View Post
That is what the MAP, minimum advertised price, argument is all about. If the retailers and distributors all agree to a specific price point then the industry is controlling the price rather than the open market.
MAP is not, by definition, the selling price, so it can't be called "price fixing." It's to give you a ballpark idea of what you'll have to pay. If the MAP of a Neumann KM184 is way out of your budget, you'll know that you should be looking at an MXL 603 or something like that. If $9 difference in the cost of a $500 mic will sway you one way or the other, then bless you (you'll need it some day).

Dealers are still able to compete on price, it's just that the Internet (and other advertising sources) don't make it as easy as we'd hope it would for a buyer to shop price. You can call any dealer, ask the price, and, on many items, get a lower price quote. On others, generally the "commodity" items, you can't. But what MAP does for the end user that's good is narrows the spread between "list" price and actual selling price. You won't see a discount of 40-50%, it'll be more like 10-20%, but it will still be there. What it does for the dealers, and this is why you don't often see a huge discount off MAP, is that it reduces their wiggle room on price. While this may be a bad thing for any isolated case, in general, I think it's a good thing all around.

The uniformly published MAP gives you the incentive to shop for a dealer based on service or something that you just like about him. And it helps to narrow down your search for the product that will do the job at the price you can afford. And if a dealer has an opportunity to offer a special price, it's almost always for a special reason - like he bought a closeout or a shipment of b-stock. Or he's selling a system (which can be as simple as cables to go with your new effect processor) and can offer a little price break or throw a traditionally high-markup item like a cable in for free.
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Quote Originally Posted by Billster View Post
Even with the MAP, my point is that there are many choices. If you feel like the Fender stuff is overpriced, there are plenty of other manufacturers at various price points, plus the used market. It's similar to the car selling business in that way. I don't like the list price/MAP deal because it's inherently silly. They don't sell refrigerators that way.
It may be silly, but refrigerator dealers don't have to deal with competition from mail order catalogs either. Furthermore, it's a pretty well known fact among dealers in the music industry that companies like GC and others more often than not get "off-sheet" pricing from manufacturers and suppliers, allowing them to buy at prices much less than smaller dealers are offered. I'm not saying you shouldn't get a better deal for buying more product at once, but when I see mail order or box stores advertising items for less than the best price column on my dealer cost sheet, then something is wrong in denmark. MAP is a way of containing that. It doesn't keep someone from selling an item for less, but you can't advertise it for less. I often sell to customers below MAP, but I don't advertise below map either. If GC (or anyone else, for that matter) won't sell below MAP, then by all means take your business elsewhere, there are others who are willing to do so, and would probably be better served by your business than a chain store who likely won't notice the difference if you shop there or not.

Back to the lawsuit, I got an email from NAMM about it, it is so full of erroneous numbers and claims, I don't see how a judge would take it seriously. The person who filed the suit claims that NAMM and manufacturers have done their best to keep guitars out of department store type situations. He apparently forgets that every time Fender (Starcaster) or First Act, or any others have tried to put guitars in places like Walmart and the likes, the number of returns for things like broken strings, returns that would not happen in a music store because the store would just give the person a new string, goes way up, and those stores have to process all those returns. Combine that with a demand that's not as high as say, the demand for hair dryers or other items a department store sells, and you can see why department stores would not want to mess with them. I don't think the guy's claim has any merit whatsoever. And as a small shop owner who has customers in my community who spend money with GC/MF every day, it wouldn't hurt my feelings for them to be taken down a notch, I just don't think this guy's claims have any merit, whether GC is involved with the claim or not.
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Quote Originally Posted by Jon Hiller View Post
it's a pretty well known fact among dealers in the music industry that companies like GC and others more often than not get "off-sheet" pricing from manufacturers and suppliers, allowing them to buy at prices much less than smaller dealers are offered.
You don't think that Best Buy and Sears don't get better prices than the local (and practically no longer existent) appliance store?
I'm not saying you shouldn't get a better deal for buying more product at once, but when I see mail order or box stores advertising items for less than the best price column on my dealer cost sheet, then something is wrong in denmark.
The reason why mail order stores can offer a better price than a real store is because of lower overhead. What they lose in material cost, they make up for in lower operating costs. Same goes for the local appliance store that can offer a price close to the big box store (which they do because they must, in order to stay in business).
If GC (or anyone else, for that matter) won't sell below MAP, then by all means take your business elsewhere, there are others who are willing to do so, and would probably be better served by your business than a chain store who likely won't notice the difference if you shop there or not.
You're certainly free to shop around. But if you can walk out the door with it and it only costs you $10 more than the best mail order price you've found, it takes a dedicated shopper to pass up that deal.
The person who filed the suit claims that NAMM and manufacturers have done their best to keep guitars out of department store type situations.
Really, now. How many people would want to buy a $1,000 guitar from Wal-Mart? I guess there are some, but most who didn't know much about guitars would probably still want to go to a shop that had "Guitar" in its name, or at least sold more guitars than vacuum cleaners. Now, a $100 guitar is a different story.

My local Best Buy doesn't have a specialized music department as I've read some do. There's no reason why they couldn't staff that department with knowledgeable sales people. I've gotten some pretty respectable answers from a couple of the salesmen in the high end video room at my neighborhood Best Buy. I haven't reached the ready-to-buy point yet so I haven't compared their prices with other shops or on-line dealers, but the idea of buying a $1000 TV from them doesn't turn me off on principle like buying a $1000 guitar would, if they sold one.

Don't get me wrong - I'm not defending Best Buy or Target or Wal-Mart in general. I'm just saying that if they wanted to get into a new area of business, they have the resources to do it on a basis that would be at least competitive in price and service with Guitar Center. NAMM might care because they would rather keep the guitar business in the hands of an established music dealer, but on the other hand, they might be just as happy having Best Buy as a NAMM member. And surely Fender wouldn't care - they just sell guitars to dealers - they more they buy, the cheaper they get, just like potatoes in the grocery store.
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I have always been an advocate of dealing locally. I few years ago I bought an Ibanez Aricore guitar. I shopped the net to get a decent price, and, of course, all the "published" internet prices were the same. My plan was to get a good price on the Internet and then shop my local store. I eventually walked into the local store and simply asked for the best price on the guitar I was looking for. I never mentioned the internet pricing that I had received. They beat the "published" internet prices by a mile, more than enough to make up for the taxes that I had to pay, and they threw in a case that was $60 on the net. Sometimes it deals to shop in your back yard, other times it doesn't. When I was rebuilding a hurricane damaged house here I bought my Jenn-Air appliances out of Kansas City. No one could (would?) come close to the pricing I got from a dealer that I contacted first on the internet. The price difference was way more than the shipping cost from KC to Florida. Now, if only I had the time and skill to learn to play that guitar.

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I wish musician's friend had a true Canadian distribution centre to put some price pressure on Long & McQuade and Tom Lee. Musician's Friend will ship many brands to Canada (except Mfgs such as Fender, Roland and Yamaha whose channel agreements don't permit this), but the taxes for items shipped across the border (GST/PST/HST, duty, shipping) make online purchases from MF, Sweetwater, SamAsh, etc. uncompetitive.

Long & McQuade and Tom Lee are regional chains and have online stores, but even factoring in exchange rates, the prices in Canada are higher than in SF or US online stores.

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I think Chuck Surack will be very surprised to find out that GC et al have a near-monopoly on the biz. Also Best Buy, zZounds, Audiomidi.com, Sam Ash, etc.

I haven't read the suit, but it seems to ignore that prices on musical instruments have never been lower, especially when adjusted for inflation. If companies are in collusion to keep prices high, they're doing a really poor job.

And I feel kind of bad for NAMM, whose "price-fixing" was, as I understand it, an attempt to get manufacturers together and sort out the confusion among list/street/MAP/retail prices.

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Quote Originally Posted by MikeRivers View Post
You don't think that Best Buy and Sears don't get better prices than the local (and practically no longer existent) appliance store?

No, that's exactly what I am saying, except that in the music industry, my experience has been that some companies I have seen won't even offer a mom and pop the chance to buy at the same pricing. This isn't as prevalent as it used to be, but again, when a chain is selling something for less than the best price my shop would be allowed to purchase it at, then there's some unfair trade practice going on, that's what I was referring to. And you're right, local appliance stores have pretty much gone by the wayside. We haven't had one in my community for over 10 years now because of box store competition.



The reason why mail order stores can offer a better price than a real store is because of lower overhead. What they lose in material cost, they make up for in lower operating costs. Same goes for the local appliance store that can offer a price close to the big box store (which they do because they must, in order to stay in business).

A lot of stores that still sell appliances do so as part of a buying group. There is a True Value hardware store in Carbondale (about half an hour from where I am located) that sells appliances, however, they buy them through their agreement with the True Value buyer's group, so that they can compete. There have been multiple attempts in the Music Industry by people to start up buyers groups, but most of the guitar manufacturers simply refuse to sell to them, stating that they only want to deal with individual franchises, which often require buy-ins that a small shop could never afford. $90,000 yearly opening order for Gibson? And you can't back order, you have to take it from what's in stock at the time? If you are a small shop, you'd have to be out of your mind to try to take that on, unless you are in a very, very high traffic situation.



You're certainly free to shop around. But if you can walk out the door with it and it only costs you $10 more than the best mail order price you've found, it takes a dedicated shopper to pass up that deal.

Really, now. How many people would want to buy a $1,000 guitar from Wal-Mart? I guess there are some, but most who didn't know much about guitars would probably still want to go to a shop that had "Guitar" in its name, or at least sold more guitars than vacuum cleaners. Now, a $100 guitar is a different story.

Mike, I think you are spot on here. But the argument was made by the guy who filed the lawsuit, according to the email I got from NAMM, that both Fender and NAMM have put their efforts together to keep guitars out of those stores. NAMM's argument is that maybe those stores don't carry guitars because they are better equipped to sell a vacuum or a hair dryer, and I think that makes sense. Those items don't really require any sort of dealer support or much in the way of maintenance, unlike guitars, which occasionally do. Not to mention the fact that pretty much every household in the US has a vacuum and a hair dryer, making the demand for those items a LOT higher than it is for any sort of music instruments.

My local Best Buy doesn't have a specialized music department as I've read some do. There's no reason why they couldn't staff that department with knowledgeable sales people. I've gotten some pretty respectable answers from a couple of the salesmen in the high end video room at my neighborhood Best Buy. I haven't reached the ready-to-buy point yet so I haven't compared their prices with other shops or on-line dealers, but the idea of buying a $1000 TV from them doesn't turn me off on principle like buying a $1000 guitar would, if they sold one.

Don't get me wrong - I'm not defending Best Buy or Target or Wal-Mart in general. I'm just saying that if they wanted to get into a new area of business, they have the resources to do it on a basis that would be at least competitive in price and service with Guitar Center. NAMM might care because they would rather keep the guitar business in the hands of an established music dealer, but on the other hand, they might be just as happy having Best Buy as a NAMM member. And surely Fender wouldn't care - they just sell guitars to dealers - they more they buy, the cheaper they get, just like potatoes in the grocery store.
Most of what I repeated in my post came from the email I got from NAMM. I just don't think the guy has a valid argument, really. I think you're right about NAMM, I don't think it really bothers them one way or another who manufacturers sell to, and frankly, that's not really NAMM's business. Don't get me wrong, I am not down on NAMM by any means, but these days at least, they are more about offering services to dealers that maybe those dealers couldn't otherwise garner, like discounted health insurance and discounted credit card processing, and ways to promote music making, like the Mr. Holland's Opus foundation for poor school districts, and the weekend warriors program. And NAMM seems to me like they do a good job at what they do. I have no complaints about them, anyway.
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