As with Napster, MP3.com's ordeal is a test case for copyright law and the online distribution of music and other easily digitized and duplicated material. The judge in Wednesday's ruling against MP3.com clearly meant to send a message to other Netcos that, while they may rule in their domain, ”the law's domain knows no limits."”
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Although New York federal Judge Jed S. Rakoff might in principle share that sentiment of Michael Robertson -- chairman and CEO of MP3.com (Nasdaq: MPPP) -- he also believes the music portal offered "no credible evidence" to counter what he called "clear and convincing proof" that it willfully violated copyright law by commercially distributing recordings owned by Universal Music Group.
With that, MP3.com was ordered Wednesday to pay Universal's parent, Seagram Company (NYSE: VO), damages of $25,000 for each CD copied for use on its My.MP3.com service. The exact number of CDs will be decided by the judge in November, but is expected to be between 4,700 and 10,000 disks. Universal originally asked for $45,000 per CD.
MP3.com says it will appeal the decision. The company had some $300 million in cash as of June, and says it has set aside $150 million to cover the cost of the suit. Shares of MP3.com were halted Wednesday ahead of the ruling, and closed at $7.88, down $0.69 cents. Today's mid-day trading finds the stock trading at about $6.50.
Behind the popular song
Wednesday's damage award follows an April ruling on MP3.com's liability in a copyright infringement suit filed by the five major recording companies. The company subsequently settled with four of them for an estimated $20 million each. It was unable to settle with Universal, currently the largest label in the group, which also includes Sony's (NYSE: SNE) Sony Music Entertainment, Bertelsmann's BMG Entertainment, Time Warner's (NYSE: TWX) Warner Music Group, and EMI Music Group, currently seeking European approval of its merger with Warner Music.
MP3.com's Robertson said negotiations with Universal are continuing. It is reported, though, that terms of the earlier settlements stipulate they be renegotiated if they are exceeded by an agreement with Universal.
Despite the legal settlement with the major labels, MP3.com has not negotiated commercial rights to their recordings. As a result, My.MP3.com has operated since April in the limbo that file-sharing service Napster narrowly avoided in July, when an appeals court lifted an injunction ordering it to block access to major label recordings. Since those recordings are by far the most popular -- that's what makes the majors major -- a service that's shut out is effectively shut down.
Huge profits, somewhat-novel technology
As with Napster, MP3.com's ordeal is a test case for copyright law and the online distribution of music and other easily digitized and duplicated material, and Judge Rakoff clearly meant to send a message to other Netcos that while they may rule in their domain, "the law's domain knows no limits."
"There is no doubt in the court's mind that the potential for huge profits in the rapidly expanding world of the Internet is the lure that tempted an otherwise generally responsible company like MP3.com to break the law and that will also tempt others to do so if too low a level is set for the statutory damages in this case," Rakoff said.
The judge found evidence in the case that, he said, strongly suggests some online companies "may have a misconception that, because their technology is somewhat novel, they are somehow immune from the ordinary applications of laws of the United States, including copyright law."
O solo Yahoo!
Portal giant Yahoo! (Nasdaq: YHOO) is apparently one online company not under that misconception. In a separate but ultimately related move yesterday, the portal announced a licensing agreement with the Recording Industry Association of America that sets the terms and conditions for Yahoo!'s use of RIAA member material.
The deal, terms of which were not disclosed, was negotiated directly between Yahoo! and the RIAA. It did not involve the Digital Media Association (DiMA), an industry coalition representing online companies in their dealings with the RIAA and in which Yahoo! is a member.
In establishing music royalties one-to-one with the record industry, Yahoo! broke ranks with other members of DiMA, which is currently in arbitration talks to determine royalty schedules for songs played over the Internet. Other DiMA members include Amazon.com (Nasdaq: AMZN), America Online (NYSE: AOL), CMGI (Nasdaq CMGI), Iomega (NYSE: IOM), Liquid Audio (Nasdaq: LQID), RealNetworks (Nasdaq: RNWK), Emusic.com (Nasdaq: EMUS), and Listen.com. Notably absent from the group is MP3.com.
The reasons Yahoo! went solo on this are as simple as they are telling: Doing its own deal with the RIAA lets Yahoo! get on with it and move forward while others tap their toes at the table. The terms it got might not be as good as what DiMA will likely negotiate with the RIAA. Yahoo!'s calculation, though, is that its scale and the advantage of moving forward faster would mitigate any downside of a separate, private deal.
Besides, one size doesn't always fit all, and scale matters. Yahoo! provides online music services for over 500 Internet and traditional broadcast radio stations, with most of the programming rebroadcasts from conventional radio stations. "Simply knowing what the economics of this license are is a step forward," a Yahoo! VP was quoted as saying. "We felt it was really important to control our own destiny."
For more on the intellectual property and the Web today, see Rob Landley's column, "Lawsuits Cripple Capitalism," in the Rule Maker Portfolio.
Your Turn:
What does the MP3.com case mean for online music distribution? By helping itself, has Yahoo! set back the easy availability of digital music? Share your thoughts with other Fools on the MP3.com and Yahoo! discussion boards.
Related Links:
Napster and the Convergence Blender, Fool News, 8/31/00
MP3.com Settles With Sony, Fool News, 8/22/00
Intellectual Property Is an Oxymoron, Fool on the Hill, 8/14/00
MP3.com Tunes In to a Double, Daily Double, 6/19/00
I Want My MP3, Dueling Fools, 5/31/00
Fool Interview with MP3.com CEO Michael Robertson, 5/23/00
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