Plan B for Net Investors: Legal Music?

The continuing legal attacks on Napster, the free file-sharing software, and on, the downloadable music site, have spooked investors, according to the financial press.'s stock got hammered hard, dropping by about 40% almost immediately in the wake of a recent decision by US District Court judge Jed S. Rakoff in favor of the Recording Industry Association of America's copyright-violation complaint against the Internet startup.

One beneficiary of the abandonment of the "free music" movement has been, a downloadable music site boasting strategic agreements with 600 record companies—all agreements legal and copyright-compliant. Those 600 companies represent about 65% of all record labels, according to Dow Jones Newswires.

The past few months have been a roller-coaster ride for the subscription music service. Over the winter, as grew in popularity, fickle investors had been unloading their shares of Emusic. The stock saw a steady downward slide, from more than $18/share in December to less than $2/share in April, but a series of legal setbacks for the free-music sites has caused investors to begin flocking back to Emusic. In the first week of May, Emusic's stock was bid up almost 100%, closing at $4.12 on Thursday, May 4. "A lot of investors see us emerging as the leader," said's president and CEO, Gene Hoffman, Jr. "We built a legal business that scales very nicely," he added.

Key word: legal. Unlike free-music sites, whose operators dance around copyright issues, has pursued from its inception honest business dealings with the music industry. The copyright and Internet distribution agreements that the site negotiated with record labels cost millions of dollars. The strategy was dismissed as hopelessly naïve a few months ago, but now appears to offer the most promise for the future. "The perception up until the past two weeks could have been that the rights were worthless," said Pacific Growth Equities analyst Brian Alger of Emusic's deals with the labels. "But with the ruling and recent actions by Metallica and Dr. Dre against Napster, copyrights are being upheld."

On Tuesday, May 2, announced that its subsidiary will provide content (music-industry information, artist profiles, and album reviews) to Microsoft Corp.'s The following day, Launch Media Inc. debuted a digital-music download home page with links to and Liquid Audio Inc.'s websites, exposing the music services to 3.5 million additional viewers. Both developments have helped renew investor interest.