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Friday, Nov 27, 2009
MP3.com basks in a landmark agreement with the majors. But how will the audio company turn the deals into profits?
Jun 14, 2000 | After a few tough months watching his company get clobbered in federal court for violating record label copyrights -- and facing a potentially life-threatening ruling in August -- MP3.com founder and CEO Michael Robertson has reason to gloat about his future.
Last week, Robertson penned licensing agreements with two of the Big Five major label players, BMG Entertainment and the Warner Music Group. "We have a catalog-wide licensing for content from Warner Bros.," he boasted. "You know how many of those Warner Bros. has ever granted? One, and it's to us."
The headline-grabbing deal -- which immediately pumped up MP3.com's languishing stock -- allows MP3.com users to stream (i.e. listen to songs online but not download them to their hard drives) the majors' vast musical catalogs. MP3.com will agree to pay a royalty on each song played. The company hopes to finalize similar licensing deals with the remaining three majors -- Universal, Sony and EMI.
The agreement is the result of a messy court fight over Robertson's MyMP3.com service. Launched in January, MyMP3.com was an ingenious feature that allowed users to instantly access digital versions of CDs. MP3.com made the music available by creating a massive 80,000-CD libary database.
There was just one problem: The company never asked the labels' permission. Nor did it pay a cent in royalties to labels, artists or publishers. MP3.com argued that the move fell under the "fair use" exemption of existing copyright law. The Recording Industry Association of America scoffed, suing MP3.com on behalf of the industry.
In an April ruling, Judge Jed Rakoff nearly laughed the online company out of court. ("The complex marvels of cyberspatial communication may create difficult legal issues; but not in this case.") Even worse, Rakoff signaled that he'd spent the summer tallying an appropriate figure for damages (the major labels wanted $6 billion).
Now, as part of the new agreement, MP3.com will cut Rakoff off at the pass and pay the majors a proposed $100 million in damages. Not such an onerous burden, as cash-rich MP3.com has approximately $380 million in the bank.
Robertson isn't interested in dwelling on the battle over MyMP3.com. "It's important to look at the new ground we're breaking," he insists. Still, many in the business can't resist playing Monday morning quarterback.
The lingering debate: Was MyMP3.com a gutsy and savvy way for Robertson to get a group of otherwise-reluctant major labels to take his company seriously at the negotiating table? Or was the MyMP3.com launch a poorly thought-out initiative that cost the company $100 million in damages, and, with an unfriendly August ruling looming, substantially higher licensing fees that will make it difficult for the MyMP3.com service to break even?
"In my opinion, they've made some mistakes," says Scott Greenberg, an analyst for Streetadvisor.com. "Michael is a very bold and aggressive and relatively young CEO, so that's inevitable."
Others suggest that if Robertson had approached the labels about licensing before launching MyMP3.com, "he'd still be at the negotiating table right now," says Eric Scheirer, media and entertainment analyst for Forrester Research. "He paid a lot of money [$100 million], but what else are they going to do with all that cash? He spent it very effectively."
