Vivendi Universal Will Buy MP3.com

It's sometimes amazing how courtroom adversaries can become bosom buddies. This week's example: on May 21, Vivendi Universal SA agreed to acquire Internet music portal MP3.com Inc. for $372 million (423 million euros) in cash and stock—or $5.00/share for MP3.com stockholders. The announcement followed Vivendi's April 5 acquisition of Emusic.com for $24 million. The targeted companies' boards of directors unanimously approved both deals. MP3.com will continue to offer music from non-Universal labels, according to a company press release.

Universal Music Group, Vivendi Universal's music division, had been one of the plaintiffs in a prolonged copyright infringement suit against MP3.com. The website had built a loyal subscriber base by letting users assemble personal music libraries on MP3.com server computers, which could then be accessed from any Internet-connected computer. An honor system was in place to insure that subscribers actually owned the discs they were archiving, but no verification was required to prove that the discs had been purchased. Users could upload recordings borrowed from friends, or picked up elsewhere on the Internet, and then listen to them for free.

The "free" aspect was what provoked the music industry's "Big Five" into launching lawsuits against the site. Most of the plaintiffs settled for approximately $24 million in damages and a guarantee that royalties would be paid for the future use of recordings. Universal Music held out for more, and in November settled for $53.4 million in damages and attorney fees. Unlike Napster, MP3.com won grudging respect from the music industry for its willingness to alter its operation to accommodate copyright concerns.

Furthermore, despite the legal wrangling, Bertelsmann's BMG thought that MP3.com's basic business model—and the technology that had been developed to serve it—held plenty of promise for the future and agreed to invest in the company, to the dismay of some fellow plaintiffs. Executives at Vivendi Universal apparently think so too. While many music labels perceive Internet music as a threat to traditional sales, Vivendi recognizes that rapid developments in wireless technology mean that music lovers soon will be able to access their personal music libraries from anywhere—not simply from hard-wired computers. Wristwatch-size or pocketable portable devices will become commonplace, and bundled with them will be Vivendi's software. Some observers are calling Vivendi's strategy a plan for world domination of Internet-based music.

Universal and Sony Corporation were previously collaborating on Duet, another Internet music distribution scheme. Duet will still go ahead as planned, with a debut slated for this summer. Duet and MP3.com will be operated "at arm's length" from one another, according to Vivendi CEO Jean-Marie Messier. In a statement from Paris, Messier said he had informed Sony Chairman Nobuyuki Idei before proceeding with the acquisition of MP3.com. "When you have a partner, you tell him about such things in advance," he explained, going on to speculate that MP3.com's music archiving and streaming technology could be incorporated into the Duet platform. Duet will go head-to-head against MusicNet, an online music service established by AOL Time Warner, Inc., Bertelsmann AG and EMI Group PLC, using software from RealNetworks, Inc.

Vivendi and MP3.com have until late November to walk away from their deal. Nowhere to be found in myriad reports on Vivendi Universal/MP3.com, Duet, and MusicNet was any mention of audio quality.

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