Amazon's cloud risks war with labels, studios

Amazon shot past Apple and Google into the cloud and generated a lot of buzz by launching a new service last night that lets people store their digital media on the company's servers.

What the company didn't do was license the rights to do this from the major Hollywood film studios and top record companies. Certainly, many from the film and music camps believe that without obtaining the proper permission, Amazon's new service violates their legal rights, multiple sources from the entertainment sector told CNET.

Cloud Drive, announced late Monday, is a hard-drive backup service accessible via the Web. Consumers can store their digital songs, videos, photos, documents, and music. In addition, Amazon also rolled out the Cloud Player, which enables users to play the songs they uploaded to Cloud Drive. News that Amazon was preparing the service was first reported by CNET on Friday.

Sources said then that Amazon had met with some of their studio and label counterparts to lay out their plans. In those talks, Amazon executives said that they wanted to get up and running quickly and also wanted their blessing. Amazon execs said in the meetings that they were prepared to unveil the service without licenses and would negotiate them at a later date.

In an interview with The New York Times on Monday, Amazon took a more defiant tone, at least with regard to music. "We don't need a license to store music," Craig Pape, director of music at Amazon, was quoted in the Times as saying. "The functionality is the same as an external hard drive."

This was not warmly received by some of the top four labels. They have made it clear, since cloud services began to generate attention last year, that their current licenses do not allow for cloud distribution or storage. As far as they're concerned, anyone offering these features needs permission. The Wall Street Journal on Monday evening quoted a Sony Music Entertainment representative saying, "We are disappointed that the locker service that Amazon is proposing is unlicensed by Sony Music."

The next move by the labels and studios is hard to predict. Some of the other top record labels were still assessing Cloud Drive and Cloud Player Tuesday morning and were also trying to figure out what legal argument Amazon is using to justify its position, music industry sources said.

It's unlikely the labels would at this point file a lawsuit, but the potential for a legal fight is real. EMI, the smallest of the four largest record labels, filed a lawsuit in 2007 against MP3tunes.com and founder Michael Robertson, one of the pioneers in cloud music.

EMI accuses Robertson and his company of encouraging copyright violations. The label, home of The Beatles catalog and singer Katy Perry, alleges Robertson has set up his two operations, MP3tunes.com and Sideload.com, to encourage piracy. According to EMI's complaint, Sideload helps users track down and organize links to pilfered music files on the Web. MP3tunes then is used to store the pirated content without paying a dime to the music creators.

Robertson dismisses these claims. He argues that the lawsuit is little more than an attempt by the labels to lock up the cloud so they can force consumers to pay a fee to access songs that they already own. The sides are waiting for the judge in the case to rule on summary judgment. A decision could come down at any time and the case may help determine who actually owns the cloud.

So, why would Amazon risk alienating suppliers and a possible lawsuit over the issue of licensing? One potential reason: it otherwise might have found itself mired in negotiations for months. Licensing music, especially for new cloud services, is a complex process. Talks have dragged on for years in some cases.

If Amazon was determined to be first out the door with a cloud service, time was running out. CNET reported last week that Google has begun using employees to test Google Music internally. Earlier in the month, Bloomberg reported that Apple is in talks with the major labels over giving iTunes users access to cloud-based tracks.

Instead of following the normal procedures, Amazon made the bold move to jump past Google and Apple and risk angering suppliers. Acting first may have offered too many advantages for the company to sit still.

One studio source told me recently that research has shown digital-lockers users may be reluctant to switch after going to the trouble of uploading their media. The source said the studios saw the same thing with iTunes. People don't typically leave. That means any service that acquires a user first stands to keep him or her.

One advantage that Amazon's entry into cloud storage may have is that it could prompt Google and Apple to move more quickly. Amazon was once more associated with DVDs and CDs than digital distribution. The glamour companies were Google, Netflix, and Apple, and for the past year, all eyes have been on them.

Then, earlier this month, Amazon dropped a bombshell by announcing that members of the company's Prime service would receive free-of-charge access to a pool of 5,000 streaming movies and TV shows. Analysts noted that Amazon had the money and audience to challenge Netflix's domination. The move put Amazon on the streaming-video map.

Not only did that send Netflix stock into a swoon, but it sent a message that Amazon is no longer satisfied with taking a backseat in digital distribution.