SAN FRANCISCO (06/11/2000) - He stretched the limits of fair use. He got sued and lost. But two of the "Big Five" major record labels were willing to strike a deal with MP3.com CEO Michael Robertson.
Warner Music Group and BMG, the two Big Five labels, settled their copyright-infringement claims against MP3.com on Friday for about $20 million apiece. They issued the music-download site a license to use their copyrights for its My.MP3.com service, which requires MP3.com to pay the labels each time a copyrighted song is uploaded to the system and each time a song is streamed.
"I think consumers are going to be happy," says MP3.com President Robin Richards, who led the negotiations for MP3.com. "It's not just about the Web, but wireless, PDAs, cell phones, satellite radio in your car."
Adds Kevin Conroy, president of new technology at BMG: "We have wanted to be in the on-demand music-streaming space for some time. The Internet presents us with an array of new ways to market and sell music."
Sources at Universal Music Group, EMI and Sony Music Entertainment say they are still far from reaching similar licensing agreements with MP3.com. Some say they are hardly talking to MP3.com, but all three are free to negotiate their own terms for a license, independent of any agreement reached with Warner and BMG.
The deal sets a dramatic precedent for the future of digital music. From the start, Robertson has dealt brashly with the music industry, choosing to appropriate copyrights first and seek licenses later. But the labels chose to deal with him anyway because of the strength of the MP3.com brand and their desire to expand the $40 billion recording industry. The terms of the license agreed upon Friday would set the bar for future negotiations between digital-music companies and the major labels.
The My.MP3.com service gives customers unlimited access to recordings they've stored online in virtual "lockers." Initially, they could put any CD in their drive and instantly "beam" it to their My.MP3.com storage space.
Customers also could buy a CD online and transfer it to their lockers. This feature especially upset the Recording Industry Association of America because in order to make the transfers instantaneous, MP3.com created its own database of more than 45,000 recordings without getting permission to do so from copyright holders.
The RIAA sued MP3.com for creating the database without a license. MP3.com argued that its actions were within "fair use" because they were merely facilitating the copying of recordings for the consumer's personal use. But in a partial summary judgement in late April, U.S. District Judge Jed Rakoff dismissed the argument and many others, concluding that the "defendant's infringement of plaintiff's copyrights is clear."
The ruling seemed to set the stage for a judgement against MP3.com, one that could have soared into billions of dollars depending on whether MP3.com's actions were found to be "willful."
It was against this backdrop that MP3.com came to terms with Warner and BMG.
Ironically, negotiations between MP3.com and the major labels actually began months ago. When the suit was filed, a source at Warner said, the major label and MP3.com had been close to an agreement, but negotiations were stalled.
Although the exact terms of the license have not yet been disclosed, even a minimal fee for the use and streaming of copyrighted songs could cost MP3.com tens of millions a year. Richards said this would be recouped through advertising and additional CD sales rather than through a subscription fee to My.MP3.com users.
The deal might throw a wrench into other negotiations that have been ongoing between the major labels and digital-music companies. Jonathan Potter, executive director of the Digital Media Association, has been negotiating on behalf of Launch Media, Spinner.com and My.MP3.com competitor MyPlay.com.
"There are a lot of companies that have spent a lot of time in line to get their deals done," Potter says. "[The labels] are not encouraging them to wait in line."
MyPlay.com, which just completed an $18 million round of funding, has been in buyout discussions with Yahoo about a deal that could allow people to access their own music collections through the popular portal.