MP3.com's move to copy CDs stirs debate

The picture may be gone, but many say the sentiment isn't.

MP3.com has made its David and Goliath struggle to shake up the recording industry the cornerstone of its business model. The company wants nothing less than to break the grip of established record companies over artists and listeners through direct distribution of digital audio tracks over the Internet.

But legal experts, stock analysts and other companies in the burgeoning online music industry say MP3.com may have taken the tactic one step too far this month when it launched two new services offering customers access to their CD collections online.

Having focused on creating a platform for relatively unknown artists on its Web site, MP3.com's Instant Listening and Beam-it services catapulted the company into a new realm--that of dishing up major label artists it didn't have access to before.

Other companies such as RioPort and Myplay.com offer similar services. But some observers say that MP3.com committed a grave mistake by failing to deal with the recording industry before the launch and moving ahead without discussing licensing conditions.

In doing so, the company crossed swords with the powerful Recording Industry Association of America (RIAA), which promptly filed suit alleging myriad copyright violations, exposing the company to potentially billions of dollars in damages.

The RIAA is known for its quick legal draws when it comes to new technologies in this market, but its aim hasn't necessarily been perfect. The association sued Diamond Multimedia in 1998 to block distribution of its portable MP3 player, the Rio, but dropped the challenge last summer. The RIAA also is suing Napster, charging it with contributory copyright infringement through its popular software program that allows people to search for and swap MP3 music files directly from their PCs.

That said, since the lawsuit was filed against MP3.com a week ago, the same question keeps coming up in lively online forums and private conversations: What was MP3.com thinking?

MP3.com admits that it has created a database of some 45,000 unlicensed CDs that it serves through its My.MP3.com accounts. But company executives argue that it is toeing the legal line by offering tracks under the "fair use" exemption of the copyright law, which allows consumers to make copies for personal use.

MP3.com says it makes sure that its customers have copies of the CDs they want to access through its services. It peeks at users' CD-ROM drives to verify that they have physical copies of CDs they intend to access online, or it confirms that customers have purchased CDs through a participating retail partner.

"We clearly have a database of pre-ripped CDs, but there is no license required--it's for personal use," said Michael Robertston, MP3.com's CEO. "It's simply copying the music from one medium to another, and we're simply providing a tool."

Nevertheless, intellectual property lawyers said the exemption does not appear to apply in this case.

"The essence of fair use is whether the use has commercial benefits for the user or hurts the commercial prospects of the work for its owner," said Peter Schalestock, an attorney with Perkins Coie. "I think it will be hard for MP3 to convince anyone that a large library of digital music on the Internet doesn't have commercial implications.

"Congress has expanded the concept of financial gain in copyright law to include trading copyrighted works on the Internet even when no money changes hands," he added.

Some in the industry see the company's new services as yet another example of trailblazing. More than 10,000 users tapped them in the first 36 hours alone, and more than 4.4 million tracks have been added to My.MP3.com accounts.

"I think consumers like the concept of having access to their music anytime and anywhere; Beam-it and Instant Listening are clearly bold moves that make MP3.com a true pioneer," said Dan Rodrigues, president of Scour.com, a streaming media and digital music search engine. "We view the recent litigation over what constitutes infringement and unfair competition as merely a part of the natural evolutionary process."

But others counter that MP3.com's failure to get clear permission before making the copies can only be described as reckless. Companies such as RioPort, Myplay, Liquid Audio and Launch.com all have made deals with the record labels in one way or another to distribute their content now or in the future.

"You can beat the street and have all the good earnings in the world, but if you have a big lawsuit against you like this, you could be in big trouble," said Jeff Hirshkorn, senior market analyst for IPO.com, referring to MP3.com's better-than-expected earnings, released yesterday.

"As an investor I would be upset, because I think it's a shoddy business practice," he added. "I mean, Liquid Audio is (encoding popular music), but they have the approval of the record companies."

MP3.com's rivals say the company went wrong by failing to sit down at the table with the RIAA in the first place. They may use the incident to steer major record content their way instead.

Myplay, for instance, also provides a service that lets online users store digital tracks and share their playlists with friends. The RIAA says it has no problem with that company's service--the difference is that Myplay played nice.

"Myplay first went out and spoke to the record industry to actively seek out solutions and work with the copyright owners to talk about the service and how they can make sure it's not leading to piracy," an RIAA spokeswoman said.

Although licensing fees are still being worked out between the recording industry and Webcasters, however, Myplay is keeping track of its users' activities and has agreements to pay the labels and songwriters royalties for their work when it's included in Myplay users' playlists.

Myplay said it considered offering services like MP3.com's Beam-it and Instant Listening but decided to stay away.

"We thought it would be a great service to consumers, but we made a decision from day one to work in cooperation with the record companies rather than go against them," said Doug Camplejohn, CEO of Myplay. "It wasn't worth the risk of betting the whole company the way Robertson's bet the future of MP3.com that he can beat the RIAA and record companies in this lawsuit."

Throughout the Net music industry, companies face constant legal questions that come with forging a new frontier. And music, unlike books or even movies, brings up more complicated consumer use and copyright issues because people play their collections over and over again on multiple devices.

"We've chosen to make love, not war, and spent a long time negotiating licensing fees for the music videos we stream. It was a painful process," said Dave Goldberg, CEO of Launch.com. "We'll be very interested to see what happens with MP3.com. If the court says it's legal, we'll also be interested in doing it. If not, then they figured it out and we don't have to get into a battle with the record labels over it."

For its part, MP3.com says it did discuss the products with the RIAA after they were released, but the talks ended abruptly because the RIAA wanted the company to shut down the service until the dispute was resolved.

Robertson said that he doesn't think the company has been careless with its investors' money, and he's written countless articles to try to "educate" the industry about the future of digital distribution. The lawsuit is the cost of being a maverick, he contends.

"We think we have a right to do what we do," Robertson said. "One year ago, Diamond was in court with the RIAA over their portable MP3 player. One year later, every major manufacturer out at the Consumer Electronics Show in Las Vegas was demonstrating a portable MP3 player. This is just part of pushing the envelope in the music industry."

The company is taking its case to Capitol Hill as well. MP3.com's lobbying firm, Federal Legislative Associates, is trying to get face time with lawmakers to encourage them to back up MP3.com's business and to try hedging the issue in hearings on the America Online-Time Warner merger, which will affect the Net music sector.

"We want the Hill to understand what this lawsuit is about," said Philip Corwin, MP3.com's Washington counsel. "If the RIAA doesn't win this lawsuit, they could try to go to Congress and slip some changes in the copyright law.

"Consumers have a right to take the CD they own, rip it and upload it to a remote server," he added. "The legal question is whether consumers have a right to end up in the same place with MP3.com's help."