Settles with Universal, Stock Soars

Investors have shown an inexplicable willingness to foot the bill for's $53.4 million settlement with Universal Music Group. In the four days following the announcement of a settlement on Tuesday, November 13, the now fully legitimate Internet music site watched its stock surge to four times the value it had only a month before. Shares of closed Friday, November 17 at $9.42 each, triple the per-share price on the morning of the announcement. The stock had sunk to a 52-week low of $2.50 per share on October 11.

The hysteria was fueled by the fact that is now the only Internet music site with legal access to the catalogs of all the major record labels. Its former adversaries have all signed licensing deals, ostensibly to leverage the marketing potential inherent in's millions of subscribers.

Whether that potential will pay off is anybody's guess. To date, enormous sums of money have been spent by litigants simply to reach the present uneasy state of affairs, without any clear path to profits. "Now they are the only Web site with legal access to all major music labels' catalogs," Kaufman Brothers analyst Nitsan Hargil remarked to Dow Jones Newswire's Elena Molinari. "The question is: What are they going to do with this advantage?" Hargil asked.

Music business executives have hope for the venture, but not cannot guarantee its success. Free music sites and services continue to proliferate on the Internet, and it seems unlikely that even the "Big Five's" incredibly deep pockets and massive legal firepower will be adequate to suppress them all. There is no evidence that users have any loyalty to the site, and there is every possibility that they may abandon it when they have to begin paying for what was previously free.

Furthermore, faces further lawsuits from other plaintiffs over copyright infringement issues, and may end up paying as much as $134 million to the other four labels (Sony Music Entertainment, Warner Music Group, EMI, and BMG) who earlier settled their cases for approximately $20 million each. Executives at these companies were said to be "fuming" over the amount of the settlement Universal negotiated. Reuters news service reported November 17 that at least two of the four may try to have their awards increased—a possibility that was dismissed by CEO Michael Robertson. "We don't believe the Universal award will affect the settlements with the other four labels," Robertson told reporters.

It has been a volatile 18 months for the Internet startup. stock reached a high of $105 on the day the company went public in July 1999, and has been on a wild ride downward ever since. The stock's November 17 closing price was the highest mark it has reached since August 2000.