MP3.com Settles Copyright Suit With Two Labels

Creating an uneasy marriage of necessity between two longtime foes, online music portal MP3.com Inc. settled copyright-infringement claims by two of the world’s five largest record labels who brought the suit last January.

Time Warner Inc.’s Warner Music Group and BMG Entertainment, the music unit of Bertelsmann, are the first of the labels to settle the suit, which claims MP3.com infringed their copyrights by giving users access to an online database of 80,000 CDs.

Financial details were not disclosed by the parties on Friday. However, sources say MP3.com has agreed to pay as much as $100 million for damages to all five labels and the right to license these companies’ songs over the Internet.

The Warner and BMG deals--signed late Thursday--could have broad ramifications for both the music and computer industries. They reinforce the old economic model of licensing fees, which had been seen as fading, as the way for artists to be paid in the new Internet music marketplace.

The move is costly for MP3.com, say legal experts, forcing the once free-wheeling company to overhaul its business model. In order to survive, the company could be forced to switch from focusing on unlicensed artists to creating innovative ways to access digital entertainment over the Net.

Today, the San Diego-based company relies on advertising, not subscription fees, to support its My.MP3.com and Beam-It services. The programs have more than 500,000 subscribers and are the root of the labels’ lawsuit. My.MP3.com allowed customers to have unlimited access to music they’ve stored online in virtual “lockers.” People could pull songs off any audio CD and instantly transfer it to an online storage area, or buy a CD online and automatically store it.

MP3.com officials said it will cost millions of dollars to cover minimal fees for the use and streaming of copyrighted songs.

“[MP3.com] is paying a ton of money for something that, at least right now, they’re not getting any direct revenue. It smacks of arm-twisting,” said Malcolm Maclachlan, a senior industry analyst with the research firm IDC. “What this says is if MP3.com plays nice, they’ll have this content and maybe they’ll be around next year.”

Yet Michael Robertson, chief executive of MP3.com, insists that the company will cover these costs with advertising revenue and CD sales--not subscription fees. MP3.com plans to roll out some fee-based music services “that let people get music they haven’t heard before,” Robertson said.

He declined to elaborate further on future plans.

Ultimately, sources said, the deal could benefit consumers who, faced with a lack of legitimate options to buy songs digitally, have turned the Net into a global pirate jukebox where any tune can be had for free.

“This is terrific news for everyone,” Robertson said. “We’re excited to work with the labels and hear their ideas about how everyone from the artists to the fans can be happy.”

Robertson’s accommodating attitude--and the deals themselves--represent an about-face for MP3.com’s leader, who was once feared and loathed by some of the most powerful people in the $40-billion record industry.

Just three years ago, the mainstream discovered MP3 technology--a compression formula that allows computer users to quickly download CD-quality songs off the Internet. Piracy exploded as young consumers began freely swapping music.

Robertson emerged as a revolutionary whose San Diego company was ground-zero for the digital music movement.

“The rules of commerce are changing fast, and the record industry needs to wake up and deal with it,” Robertson told The Times in 1998. The industry runs “a real risk in arrogantly thinking that they can bully the Internet into doing what is best for the record labels.”

Instead, say analysts, it is MP3.com that has had to change. A U.S. District Court in New York ruled in April that MP3.com did infringe on the labels’ copyrights with its massive online database.

Struggling to deal with the legal troubles, Robertson slowly lost his cult status to a younger generation of software developers far more in touch with youth culture.

“Michael went from a mantra of ‘it’s all for the artists’ to ‘it’s all about the profits,’ ” said one music industry source. “He crossed the line from proselytizing to rhetoric, and he lost the support of the other online music companies.”

Today, the new-media stars are people like Shawn Fanning, the 19-year-old college student who created the song-swapping technology Napster, and Justin Frankel, the 21-year-old whose company created Gnutella, a data-exchange program that expands on what Napster started.

Label executives now see these emerging tools and their creators as more powerful--and more dangerous--than Robertson and MP3.com.

What has saved MP3.com so far is its strong brand recognition among consumers. And that, say sources, is why the labels ultimately agreed to cut a deal.

“We’re very committed to the space,” said Kevin Conroy, chief marketing officer and president of new technology for BMG Entertainment.

BMG also cut a licensing deal this week with online entertainment firm MusicBank, which has an online-storage service similar to MP3.com. The San Francisco-based start-up is cutting agreements with the record labels first, instead of following MP3.com’s path of launching the service without obtaining the necessary licenses.

“Ultimately, our mission is to market and sell artists’ music,” Conroy said. “People know MP3.com. We want to take advantage of that.”

MP3 shares rose $1.94 to close at $19.19 Friday on Nasdaq.