Lime Wire: Labels hurt by mismanagement, not piracy

NEW YORK--Edgar Bronfman Jr., CEO of Warner Music Group and heir to a huge beverage fortune, received more than $17 million in total compensation for the year 2008, even as he and his managers were laying off hundreds of employees and claiming that online piracy was to blame for much of the music industry's financial woes.

This was one of the facts that a jury was shown in federal court here today, as lawyers for Mark Gorton, the man behind the LimeWire file-sharing system, attempted to show that the file-sharing service he founded was not solely to blame for declining music sales and the industry's shrinking number of jobs. Joseph Baio, Gorton's lawyer, tried to influence the jury by painting a picture of record labels led by fat cat executives who in some cases paid themselves huge sums and were too slow to react to major technological shifts in their industry. Some of the trouble, Baio suggested, was caused by the record companies' own poor stewardship.

As a result of a lawsuit filed by the Recording Industry Association of America in 2006, U.S. District Judge Kimba Wood found Gorton and Lime Wire, the company behind the popular file-sharing service of the same name, liable last year for willful copyright infringement. A jury is now deciding how much Gorton will pay in damages. The amount could be as high as $1.4 billion.

In an attempt to convince the jury that Gorton deserves to pay a huge financial penalty, RIAA lawyers have tried to prove that Gorton and his service--which was used to obtain songs without paying for them--cost the music industry billions in revenues as well as thousands of jobs.

Since last week, when Gorton's damages trial started, RIAA lawyers have tried to brand him as a man who knew he was breaking the law when he continued to operate a type of file-sharing service that the Supreme Court had outlawed in 2005.

But today in court, the major recording companies were represented in the person of Bronfman, a billionaire who after Baio got done questioning him, didn't appear to have suffered much from the downturn in music. He also didn't appear be all that friendly to music artists or his company's employees. These are some of the people who he told the court suffered greatly at the hands of Gorton and LimeWire.

Bronfman acknowledged to the court that after he obtained control of Warner Music in 2004, one of his first moves was to cut the label's artists roster by 40 percent. Bronfman said the label's economics forced his hand.

Earlier in the day, while responding to questions from RIAA lawyers, Bronfman said that people investing in music were also getting "hosed" because piracy was eroding their investments. Baio later illustrated for the jury that Bronfman wasn't among the "hosed" group. The jury learned that Bronfman and his investment group were able to recoup their original investment just months after the company was acquired for $2.6 billion. Last week, Bronfman agreed to sell Warner Music, a public company, for $3.3 billion in cash, or $8.25 a share, to Access Industries.

Bronfman may have scored points when he said that though he did profit from the sale, Warner Music's value had decreased substantially in the past five years. He said in 2006, he received an offer of $31 a share for the company. He did not disclose the bidder, but it has been reported that EMI Music, one of the other top four record companies, attempted to acquire Warner Music that year.

Baio didn't let up. He produced documents that Warner Music filed with the Securities and Exchange Commission, which reported Bronfman made $1 million in base salary during the past five years while earning $6 million in bonus money in most of those years, or six times his salary. In 2008, the year Bronfman banked $17 million in total compensation, the company saw layoffs.

Earlier in the hearing, Bronfman had bemoaned the layoffs but put much of the blame on illegal file-sharing.

But in discussions with analysts over several different years, Bronfman had listed numerous other factors that were combining to hurt the industry. They included greater competition for entertainment dollars from video games, changes in retailing (the demise of record stores), and a reduction in album releases. He suggested that the labels' main product had outlived its usefulness.

"We all have to recognize as an industry that the CD is a tired format," Bronfman said, according to documents Baio produced.

Another charge Baio made was that the labels are suffering now because they were too slow to react to the Internet, and to online file-sharing. To support his claim, he produced a transcript of a Bronfman speech.

"We used to fool ourselves," Bronfman said in 2007. "We used to think our content was perfect just exactly as it was. We expected our business would remain blissfully unaffected even as the world of interactivity, constant connection, and file-sharing was exploding. And of course we were wrong. How were we wrong? By standing still or moving at a glacial pace, we inadvertently went to war with consumers by denying them what they wanted and could otherwise find, and as a result, of course, consumers won."

Questioning of Bronfman was cut short when Wood adjourned the hearing early, but the CEO is expected to return to the witness stand possibly this week. Gorton is also expected to testify again in coming days.