All of XM's Trials

On May 17, XM Satellite Radio was sued by the Recording Industry Association of America (RIAA), which alleged that Pioneer's personal portable XM device, the Inno, infringes on copyrights and essentially represents a digital download device.

Such a short sentence and yet in need of such extensive explanations! To start, the lawsuit was filed by Atlantic, BMG Music, Capitol Records, Elektra Entertainment Group, Interscope, Motown, Sony BMG, Universal Music Group, Virgin, and Warner Bros.

The Pioneer Inno (and the functionally equivalent Samsung Helix), does indeed record XM Radio programming, but it is a fairly limited device, containing a meagre 1GB recording capacity. However, it does have a 10-minute buffer, and it allows the user to decide to record a selection in midsong and still capture all of it. It can also be set to record a specific station at a predetermined time. What it cannot do, on the other hand, is record specific songs by previous arrangement or transfer them outside the device, say, to your computer. What it resembles most, therefore, would seem to be a satellite radio TiVo.

The RIAA alleges that XM has violated eight counts of copyright infringement: three counts of "direct infringement," essentially separating delivery, distribution, and reproduction as distinct violations; a count of "inducement" by promoting the library function of the device; a count of "contributory infringement" through XM's promotion of its services, knowing they will be used to create permanent libraries; one count of "vicarious infringement" by not preventing such uses; and two counts of "pre-1972 Works" infringement (these have to do with State law issues).

If the RIAA intended its action to cow XM into re-thinking its personal portable category, it misjudged. XM fired back a strongly worded statement to "the XM nation", claiming: "The music industry wants to stop your ability to choose when and where you can listen. Their lawyers have filed a meritless lawsuit to try and stop you from enjoying these radios.

"They don't get it. These devices are clearly legal. Consumers have enjoyed the right to tape off the air for their personal use for decades, from reel-to-reel and the cassette to the VCR and TiVo."

The company ended with a vow to "vigorously defend these radios in court and before Congress, and we expect to win." XM also observed, "Satellite radio subscribers like you are law-abiding music consumers; a portion of your subscriber fee pays royalties directly to artists. Instead of going after pirates who don't pay a cent, the record labels are attacking the radios used for the enjoyment of music by consumers like you. It's misguided and wrong."

Many industry observers agree. The Electronic Frontier Foundation (EFF) leapt to XM's defense, calling the suit "an attack on home taping" and an attempt "to hold design against innovators." EFF lawyer Fred von Lohmann inveighed against the "thermonuclear effect that statutory damages has in cases involving recording devices. For example, the RIAA is seeking $150,000 in damages for each song recorded by any XM subscriber." Von Lohmann is also outraged by the complaint's further allegation that XM automatically infringes every song on every channel to which an Inno is tuned because of that 10-minute buffer, which the RIAA sees as outright copyright infringement—even though TiVo has long had a similar 30-minute cache.

The Digital Music Weblog's Grant Robertson concurs. "The scary part of this, and the real heart of the problem, is that we've settled this all before. The Audio Home Recording Act, in a House Report issued August 4, 1992 states, 'In short, the reported legislation would clearly establish that consumers cannot be sued for making analog or digital audio copies for private noncommercial use.'"

After quoting Bears Stearns analyst Robert Peck, who said, "We think the RIAA is merely aiming to receive additional compensation, which XM could pass on to the subscribers as premium service, if required," Robertson added, "I hate to be so venomous, but that's a very nice way to say that the RIAA is merely running an extortion scam against XM subscribers. Pay up, or the shiny toy you bought won't work anymore."

"The real issue," Kraig Baker, an attorney with Davis Wright Tremaine, told TechWeb's David Haskin, "is control."

Interestingly, the RIAA complaint may have distracted the press's attention from a far more harmful issue: tech guru Walter S. Mossberg's thumbs-down review of the Inno in May 17's The Wall Street Journal. As is his wont, Mossberg said little about the sound quality of the Inno, but he did thoroughly cover its features and functions, before concluding: "When it's all said and done, XM's Inno is fun to use on the go, as long as you're not underground or in a room without windows. But its spotty reception, confusing software and monthly fee make the Inno a no-go, except for hard-core XM fans."

In the gadget world, a tepid Mossberg quote can be the kiss of death; a no-go might well bury one—assuming anyone noticed it in the midst of all the lawsuit brouhaha.

XM has been getting its share of poor press lately. Bob Lefsetz has been giving it a proper shellacking in his The Lefsetz Letter, complaining about XM's shrinking playlist, increased number of commercials, and unimaginative talent roster (XM's acquisition of Oprah seems to particularly stick in his craw).

Lefsetz is not alone in his criticism. On the economic blog The Big Picture, Barry Ritholtz asked, "Will XMSR's customer complaints kill its stock?" Ritholtz observes that XM stock has dropped to less than 50% of its January 2005 high of $40/share. His take? That by dropping "deep music" offerings like Music Lab and adding over-served markets like additional "all hits all the time" channels, XM has tampered with its basic business concept, which was based on choice and music not offered by terrestrial radio. Diluting that product makes it harder to distinguish from existing—and free—alternatives.

That, Ritholtz argues, is a recipe for disaster. Just ask Dell, he opines.

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