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MP3.com & Universal - What's Behind the Deal?
The Major Labels' Strategy Becomes Clearer
By Margee Fagelson
(more articles from this author)
2000-11-21
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The court has ordered MP3.com to pay $53.4 million to Universal Music Group and MP3.com may have to make up that difference to the other four labels if the rumored legal action(s) are successful. MP3.com is set to pay $163.4 million to record labels and music publishers as part of the resolution already but if the 'Most Favored Nations' clause holds fast, they'll be out another $134 million.

In January of this year, MP3.com introduced a service called My.MP3.com, which featured instant audible access to a whole lotta music. Through functionality they called 'Beam-It' the user could merely insert a CD into the CD-ROM drive on their computer. The My.MP3 service would then acknowledge 'ownership' of the CD and allow unlimited access to the tracks from that album, through My.MP3.com. The other option My.MP3 offered was the 'Instant Listening Service' which allowed the end user to purchase the CD from a partner retailer. This also acknowledges (prior) ownership of the selected track, thereby ostensibly justifying the end user's access. The glitch here was that My.MP3.com was not reading the track off the inserted CD-ROM nor 'buying' the track off the newly purchased CD or an individual track e-tail partner. MP3.com had taken it upon themselves to purchase in excess of 80,000 CDs and upload the tracks to their server…without licensing them or obtaining copyright permission first. Oops.

Without hesitation, several members of the music industry took umbrage and joined together - under the umbrella of the Recording Industry Association of America - to file suit against the company for copyright infringement. The RIAA filed a complaint on behalf of Warner Music Group, BMG, Sony Music Entertainment, EMI and UMG. In June, MP3.com was able to settle with WMG and BMG followed by an EMI settlement in July and a Sony settlement in August while Universal held fast to their complaint. In October, MP3.com worked out a preliminary three-year, $30 million licensing agreement with the National Music Publishers' Association's subsidiary, The Harry Fox Agency.

At an industry conference in LA last week, there were rumors suggesting Strauss Zelnick, President of BMG was the secret strategist behind the whole thing. If so, this could shed new light on Zelnick's recent resignation from Bertelsmann. In fact, Zelnick or whoever else masterminded the whole process could easily have followed the suggested (theorized) process as laid out in earlier this year in Webnoize.

Step 1. 'Big Five' bring suit against MP3.com

Step 2. One by one, each of the five drops out of the suit, necessitating a separate legal settlement and license agreement.

Step 3. Throughout the process, each unique agreement and settlement require a 'Most Favored Nation' clause to be included, assuring that no one gets a better deal than anyone else does.

Step 4. One label is the bad cop and holds out, retaining the option and the power to obliterate the opponent or step in like a white knight and save it through acquisition.

As part of the agreements, MP3.com - in addition to the sums they must pay out per legal settlement - must pay a royalty to each label/publisher every time a CD is paid, regardless of the fact that the end user has already paid for the CD. Also, Michael Robertson - MP3.com CEO - announced on Thursday, November 16 that the My.MP3.com service may relaunch at the end of November, but not for the same low, low price of $0.00. Robertson and the MP3.com team are looking at a tiered subscription service. With the competition from Napster looking as if it's drawing to a close (will they be free much longer?) and the constant - daily - news about Scour's lifespan, My.MP3.com could be poised to be a success. They already have great branding and are known as a good destination for new music. The new tiered service would offer frequent users a subscriber fee which would also provide them with the kinds of subscriptions they want - per genre or perhaps per piece - though there would remain an option to access music for 'free' with storage limits imposed and advertising unavoidable.

In a twist, Webnoize's Mark Lewis on November 15 reported that part of a pre-trial memo - part of MP3.com's filings - included complaints against the Universal Music Group, charging that they and their subsidiary label, Interscope Records 'have engaged in a steady pattern of knowingly deceptive practices with respect to the registration of sound recording copyrights.' Lewis claims this was a strategic move on the part of MP3.com to try to reduce the total sum of officially infringed copyrights at UMG. A pre-trial memo promised evidence to support these charges and UMG admitted that their Polygram and A&M Records divisions have accidentally filed illegal copyrights but dismissed any malice or intent to defraud the Copyright office as 'ludicrous.' MP3.com promised evidence to support the charges of "a steady pattern of knowingly deceptive practices," but they never went to trial.

This is all crucial to the end of this story, for the UMG settlement was substantially lower than many had surmised. The question remains to be answered: Why did UMG settle for so low a sum without complaint? Is it being made up in the stock deal, in which MP3.com has issued warrants to UMG to purchase up to 3,000,000 shares of its common stock at prices ranging from $3.75 to $5.00 per share. This stock purchase and price will range over terms of one to three years. Should this all conclude completely and positively it would yield UMG a stake of what is rumored to be between 5% and 20% of MP3.com.

And just so my loyal readers don't think I'm completely unhappy about UMG winning…here's the good news. UMG has promised to share the damages awarded them with the artists whose creations were unlawfully duplicated. So, regardless of what proceeds…UMG being charged - officially - with their own version of copyright infringement, UMG owning the bulk (or some portion) of My.MP3.com, MP3.com taking the lion's share of the file-sharing community and UMG artists (finally) being substantially and generously awarded for being signed to a major label…it ain't over yet!

  Linkography

  BMG - http://www.bmg.com
Interscope - http://www.interscope.com
MP3.com - http://www.mp3.com
Napster - http://www.napster.com
NMPA - http://www.nmpa.org
Polygram - http://www.polygram.com
Scour - http://www.scour.com
Sony -http://www.sonymusic.com
UMG - http://www.umusic.com
Webnoize - http://www.webnoize.com
WMG - http://www.warner.com/music/

Related MusicDish e-Journal Articles:
» The Judge Rules in Universal Music Group's Lawsuit Against MP3.com (2000-09-12)
» Music as a Service: Michael Robertson at EAT'M (2000-06-14)
» MP3.com Settles With Major Record Labels - Two Down – Three To Go (2000-06-13)
» My.MP3.com: A Watershed for the Online Music Industry (2000-05-01)
» Will MP3.com settle? (2000-04-12)

Related News from Mi2N:
» Court Awards Judgment To Universal Music Group In Copyright Infringement Suit With MP3.COM
» Statement Of Hilary Rosen On The Judgement In The Universal Music Group, MP3.com Lawsuit
» MP3.com Announces Class Action Complaint
» MP3.com Issues Warrants To Universal Music Group


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