Settles with Two Major Labels, Stock Surges

One battle in the copyright war is over. announced Friday, June 9, that it has reached a settlement with BMG Entertainment and Warner Music Group, two of the music industry’s "Big Five" that had sued the online music company for copyright infringement. Although will have to pay some serious damages---possibly as much as $100 million once the other litigants resolve their cases---it gained a licensing agreement with the two major labels that could be worth far more in long-term business. "It's a heck of a price to pay to get the keys to the kingdom," analyst Phil Leigh told the Wall Street Journal, "But now they have the crown jewels."

"The settlement agreement clearly affirms the right of copyright owners to be compensated for the use of their works on the Internet," Warner Music Group vice president Paul Vidich said. Similar sentiments were expressed by a BMG spokesperson, who described the settlement and license agreements as "a significant step for enforcing music copyrights and protecting artists' rights online."

Settlements are expected soon with the others: Universal Music, Sony Music Entertainment, and EMI Recorded Music, none of whom would comment on the negotiations. The record companies had sued San Diego-based over its unauthorized archive of hundreds of thousands of recordings, which were uploaded by the site’s members for access from any Internet-connected computer. After the lawsuit was initiated, disabled its service, preventing the storage of any further recordings until the issue was settled.

The site may soon be back in operation. Investors greeted the news enthusiastically, bidding’s stock up to a high of $22.50/share, more than double where it stood only two weeks earlier. The stock closed on Friday at $19.18, up 10% from the previous day.

Investors apparently believe that is a viable operation, despite the fact that costs incurred from the legal battle and licensing agreements will force the site to find new ways to pull in money, including possible subscription fees for members---from $25 to $40 per person annually, according to some estimates. Previously,’s business model was based on revenue from advertising that appeared on its site, with the music archiving-and-accessing service offered for free. Sales of CDs, music-related paraphenalia, and concert tickets are other possibilities. Analyst Leigh believes the company will succeed, especially in view of the fact that the record companies settled for far less than they might have gotten had they pushed the case further.

There is good reason to doubt his optimism, however. Internet users, long accustomed to getting everything for free, may balk at spending money for the service (see related story). Other sites, such as, offer similar services. The major labels themselves are busy developing their own online operations, but will be perfectly willing to sit by and watch as the startup struggles to sink or swim---as long as they are getting a slice of the action.

It is clear that probably won’t be able to make it on advertising fees alone. "I don't know one company besides America Online that generates $30 to $40 per person in advertising revenue." said founder David Pakman.

"Maybe what we're seeing is one of the first steps toward a true subscription service," International Data Corporation media analyst Malcolm Maclachlan observed. "I think getting this sorted out will help people move forward in trying new music revenue models." Forrester Research analyst Eric Scheirer described the settlement reached Friday as "the starting gun for the new race in building online services for music."

In a related case, Santa Cruz, CA-based, which runs a music file search engine similar to embattled Napster’s, has taken the unusual step of suing the Recording Industry Association of America for the right to link to such files even if some of them are pirated. The suit was filed June 2 in a federal district court in San Jose, and asks that the 12-employee company not be held liable for copyright infringement if it "provided results of an automated search that might include pirated copyrighted works."

The RIAA claims that searches "turn up hundreds of links to pirated songs." maintains an index of approximately 500,000 recordings.

The case is significant because the music industry wants to find the operator of a communications system responsible for what its customers do with that system. US legal rulings have long established that providers of such systems are not responsible for how they are used---for example, a telephone company cannot be named as an accomplice in a bank robbery if the plans for the robbery were discussed over its network. Neither are airlines responsible if passengers smuggle contraband.

Lars Mapstead, chief executive of, says his company’s software has no way to determine whether or not recordings are pirated. The issue is being closely watched in Silicon Valley because "it goes right to the heart of the way the Web works," according to copyright lawyer Mark F. Radcliffe, of the Palo Alto law firm of Gray Cary Ware & Freidenrich.