Time running out for MP3.com settlement

The online music company faces potentially huge copyright-infringement damages if it can't strike a deal with one remaining record company.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
4 min read
A legal hourglass is draining to the end for MP3.com, which will face trial for potentially huge copyright-infringement damages next week if it can't strike a deal with one remaining record company.

MP3.com is scheduled to go back into the courtroom early Monday, where it will do its best to persuade a judge that it shouldn't have to pay crippling damages to Universal Music Group for using its CDs in an online music "storage bank."

The company has already settled its differences with the other four major record labels: Warner Music Group, Sony Music Group, EMI Recorded Music and BMG Entertainment. But without Universal on board, the company is still in court--and looking down the barrel of a potentially huge damage award.

"Universal has made it clear that they're not interested in any of the many settlement options MP3.com has proposed," said Michael Rhodes, an MP3.com attorney who is not directly involved in the negotiations. "Our other negotiations were tough but were consecutive and fair. My perception is that Universal has its own agenda."

Universal representatives could not be reached for comment.

The case stems from a service MP3.com launched early this year, dubbed My.MP3.com. The company created a database of about 80,000 CDs and allowed its customers to store songs from these recordings in an online "locker," accessible from any Web connection.

Trouble was, MP3.com didn't ask its listeners to upload the songs themselves, as did competing services such as Myplay.com. Instead, it created a technology that would scan a computer's CD-ROM drive for a given CD and then make the tracks from that CD almost instantly available in a person's storage locker.

The company contended that this was actually an anti-piracy device in that it required people to buy the CDs before listening to them though the MP3.com service. But the record labels didn't agree. They sued, arguing that the company's act of copying the physical CDs to the storage lockers and making those songs available to the public was copyright infringement, and a judge concurred.

"The complex marvels of cyberspatial communication may create difficult legal issues, but not in this case," U.S. District Judge Jed Rakoff wrote in his decision awarding a quick win to the recording industry.

With that done, the only thing left was to determine just how much MP3.com owed the labels--a thorny legal task. The judge gave the various parties most of the summer to come to a settlement, and most of the parties worked out their differences.

The digital music start-up struck licensing deals with four of its five antagonists. Terms of the agreements were not made public, but one source close to the agreements said that licensing terms could require MP3.com to pay the labels up to $11 million each, based on a per-play basis.

MP3.com also agreed to pay the labels an undisclosed lump sum that has been estimated in some reports at near $20 million per label.

Is settlement necessary?
As the lone holdout, Universal may be able to gain more leverage, analysts said. Certainly, MP3.com has the weaker hand in the dispute, stuck under the threat of a huge judgment and needing licenses from Universal to make sure it has all the major labels in its catalog.

"It's critical for companies like MP3.com to have all major players on board," said Steve Vonder Haar, a music analyst at research firm The Yankee Group. "Music consumers are going to be searching for music and will expect all the artists to be there."

The financial judgment itself is incentive enough, although a federal judge has limited the amount MP3.com can be held responsible for. In a long-expected decision that was officially released this week, Rakoff said the damages per "work" would be based on the number of albums, not the number of songs. Even so, the company could wind up owing Universal hundreds of millions of dollars, depending on how many Universal albums are in its database.

The incentive for Universal to settle is somewhat less. The company has already struck a deal with MP3.com rival Musicbank to host its albums online and has announced its own music subscription service in conjunction with Sony Music.

The company recently said it would pursue its own digital download format, dubbed Bluematter. That gives it less incentive to pursue the MP3 format, analysts said.

"It could be that they're holding back because they have more to protect (than the other labels)," said Jim Penhue, director of Media and Entertainment Strategies at The Yankee Group. "But they're not that far along."

The trial still has two phases ahead.

On Monday, the two sides are scheduled to address whether MP3.com intended to break copyright laws or genuinely believed that it was acting legally. They'll also be discussing how critical it is to set high damages to deter other companies from doing the same thing in the future.

But another round will follow, in which MP3.com hopes to establish that Universal doesn't legally have the right to get returns on many of the albums over which it claims copyright. Once the number of infringed albums is determined, another hearing will decide the damages owed.

That's all contingent on the lack of settlement with Universal, however.

MP3.com attorney Rhodes said yesterday that the two sides were still talking but that he was not aware of the latest developments. The companies' legal teams are flying to New York today, he said, with plans to be at federal court Monday morning.

But many analysts still expect a deal, perhaps this weekend.

"I think they'll pull a rabbit out of the hat and come up with something before they get to court or while they're going to court," Penhue said.