Mp3.com, Sony Settle

The legal saga surrounding MP3.com's battle with the music industry over its My.MP3.com streaming audio service drew nearer to a close with the Aug. 21 settlement by Sony Music of its copyright-infringement suit (BillboardBulletin, Aug. 22). The move leaves Universal as the sole remaining major-label plaintiff.

Once it can resume operations, San Diego-based MP3.com will get a chance to prove it can build a sustainable business around the My.MP3.com concept, which allows consumers to instantly and easily access online music that they have already purchased in physical form. The service is free, and the company has said that it intends to keep it that way, despite the new cost pressures its hard-won label licenses mandate. It intends to generate revenue instead through advertising and other ancillary streams.

Certainly Wall Street believes the company's model holds promise. After surging 40% to $11 in early-day trading, MP3.com's stock closed up more than 20% at $9.34 the day following the Sony announcement, which came after the market's close. The surge was similar to bumps seen in the wake of the deals with Warner, BMG, and EMI. The company's stock is still down more than 70% in the past year, however.

Reiterating its "buy" rating on the company Aug. 22, Credit Suisse First Boston said in a note to investors, "We believe that once the current legal issues clear and investors focus on MP3.com's opportunities in the $40 billion music space, shares . . . should begin to appreciate dramatically."

As with MP3.com's previous settlements with BMG, Warner, and EMI, Sony agreed to license its catalog to MP3.com on a nonexclusive, North American basis for use in My.MP3.com. The labels will receive an unspecified royalty—which sources peg at 1.5 cents—each time one of their tracks is accessed, as well as a fee for each track registered in a "personal locker."

The labels that have settled will also receive a cash payment that sources put in the neighborhood of $20 million each. MP3.com recorded a total charge related to projected copyright claims of $150 million for its second quarter of 2000.

Those terms could change, however, based on the deal Universal strikes. According to sources, the settlements struck thus far includes a "most favored nation'' clause under which each label will be "upgraded" to the best deal any of them negotiates.

A Universal spokesman declined to comment on the status of its negotiations with MP3.com.

U.S. District Judge Jed Rakoff in April issued a partial summary judgment finding that MP3.com had infringed major-label copyrights in creating its My.MP3.com database.

Rakoff later set a Monday (28) trial date in New York to determine the issue of "willfulness" and any damages to which any remaining plaintiffs might be entitled.

"It's in the best interest of MP3 to be flexible and get this done [before trial], and, of course, I think it's in the best interest of [Universal], too," says MP3.com president/chief negotiator Robin Richards.

In addition to Universal, a suit brought on behalf of music publishers also remains unsettled—promising to present a hurdle to a relaunch of My.MP3.com, even if all the labels come on board.

Ed Murphy, president of the National Music Publishers' Assn. and the Harry Fox Agency, which brought the suit on behalf of its publishers, declines to comment on the status of talks with MP3.com, other than to note that they are ongoing.

"Certainly MP3.com and others [online] seem to be coming to understand that you need approval from both the master rights owner and the publishers and songwriters," Murphy says.

For his part, Richards believes rights holders are starting to understand a little better what MP3.com is trying to do.

"There's been a fundamental change of climate in the industry, and I think we've done some things to cause that," Richards says. "The labels we've dealt with are starting to understand us a little better and trust us a little more. We're trying to communicate that we can bring tremendous infrastructure and marketing and promotion value to them, so that they see us as part of their overall marketing plan."

MP3.com may, in fact, have made that case too well—prompting several competitors to stake a claim to the nascent "personal digital locker" market, including two with major-label funding.

While details are pending, Sony Music has confirmed that it is backing a new digital-locker company tentatively slated to launch this fall. Also due by year's end is Musicbank, whose investors include Bertelsmann Ventures and the Universal Music Group.

Of the newcomers, Richards contends technical expertise will ultimately win out in the market.

"It would be foolish to think anybody in this building could pick the next star. That's not what we're very good at—that's what [the labels] are good at," Richards says. "And I think it would be equally as difficult for a media company to build a robust technical infrastructure that this requires. So do I think we'll have competition? Do I think labels will do portions of this themselves? Yeah, I do. But am I worried? No."