Stock Reviving, but Not All Sing Praises of MP3.com

Why is Wall Street so enamored of MP3.com?

Stock in the unprofitable San Diego company soared 50% last week after it agreed to fork over an estimated $110 million in licensing fees and damages to resolve a copyright infringement suit by the nation’s biggest record conglomerates.

The analyst community appears to have bought into the idea that the settlement carves out a unique spot on the digital horizon for the controversial Internet music Web site--one where it can coexist with the traditional music behemoths who once sought to shut it down.

But insiders familiar with the deal are skeptical.

The settlement, they say, is good for the record industry because it provides labels with a quick cash infusion and sets the bar for future negotiations with other cyberspace distribution outlets. But critics say it could signal the beginning of the end for MP3.com, a company that has been repeatedly criticized for subsisting on investment capital and operating without a conventional business model.

The terms of the licensing agreement, insiders suggest, are so narrow and so expensive that MP3.com would have tremendous difficulty paying the fees on a regular basis. In order to survive, insiders say the company may have to start charging subscription fees to access music--a move that is certain to alienate most current MP3.com fans, who were lured to the site by the promise of streaming and downloading recordings for free.

While MP3.com is rumored to have a venture capital war chest of hundreds of millions of dollars, before the settlement, the company already was burning through nearly $40 million a quarter.

In an interview Thursday, MP3.com Chairman Michael Robertson scoffed at skeptics who predict that the costly settlement could eventually drive him out of business.

“That’s nonsense,” Robertson said. “A lot of times, before you get into a new business and realize the enormous opportunity it can yield, something that might look expensive often turns out to be great. Remember back when the Lakers signed the Shaquille O’Neal deal? There was all this hubbub with everybody in the media screaming, ‘Oh my God! This is such an outrageous amount of money.’ Well, I don’t hear anybody in Los Angeles complaining now that the Lakers are a game away from a championship.”

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Last week’s settlement and stock surge followed a federal judge’s April 28 ruling that the San Diego-based Web site had infringed record industry copyrights by transmitting, for free, hundreds of thousands of songs to computer users who subscribe to its “My.MP3.com” service.

MP3.com was sued in January by Time Warner, Seagram Co., Sony Corp., EMI Group and Bertelsmann for copyright infringement relating to its My.MP3.com service. The record labels said MP3.com violated copyright laws by creating a database of 80,000 unauthorized albums, which allows users to store music from their personal CD collections and then access it via any computer connected to the Internet. MP3.com cut off access to all major-label music after the judge’s ruling.

In the lawsuit, the industry was seeking billions of dollars in damages. After weeks of negotiations, all five record companies have worked out an agreement with MP3.com to resolve the issue of damages with a collective $100-million payment, a portion of which, executives say, will be passed on to artists.

So far, only Time Warner and Bertelsmann have cut future licensing deals with MP3.com. As of Thursday, Seagram’s Universal Music Group, Sony and EMI Group had not yet consented to a specific structure for future licensing fees, sources said.

Under its 10-year pact with Bertelsmann, MP3.com paid an estimated $12-million advance on future royalties, sources said. Warner signed a five-year deal without advances, sources said. Neither of those deals cover the additional expense of music publishing rights--which could be significant, according to attorneys close to the negotiations.

Under the agreements, MP3.com will be required to pay about 1.5 cents every time a computer user adds a track from a CD they own to the My.MP3.com cyberlocker, sources said. MP3.com also will be required to pay about a third of a penny every time a computer user streams a song from the service, sources said.

Robertson says that’s barely one-tenth of the royalty fee he already pays to thousands of unknown artists who display their music on his site (whose sales are far less than those of most music stars). He suggests that it will be easy for his company to pay smaller fees to traditional record labels for use of their music on his service and scoffs at the notion that MP3.com intends to drastically jack up fees to subscribers of the service.

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But will computer users pay for music they once got for free and can still easily download elsewhere?

“What we’re talking about here is creating a brand new monthly music service that could be paid for by advertising or subscription or a combination of both,” Robertson said. “We are positioning MP3.com as the utility company for music in the future.”

MP3.com will thrive, he said, because it already has the technical infrastructure to store and deliver digital music and to pay royalties.

Robertson has undergone a dramatic transition over the last two years since emerging on the music scene as a rebellious cyberspace capitalist itching for a showdown with the corporate entertainment establishment. Last week, he submitted a declaration backing a motion by the Recording Industry Assn. of America to shut down Napster Inc., a rival music distribution Web site rampant with piracy.

Critics have long regarded Robertson as a reckless self-promoter exploiting the MP3 controversy to rustle up a buyer for his Web site. On Thursday, Robertson denied recent speculation MP3.com is being shopped to a number of prospective buyers, including Yahoo Inc.

“MP3.com is not for sale,” Robertson said. “We are not in discussions with Yahoo.”

Wall Street has vacillated in its support of MP3.com. On the day of its IPO last July, MP3.com stock soared above $100 but quickly slipped to $28 a share. It rebounded from a low of $7 a share in April and closed Thursday at $18.25, down 63 cents, on Nasdaq.

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3’s Volatile Ride

Shares of online music distributor MP3.com soared at their initial public offering last July, only to quickly dive. They resurged by late fall, then tumbled for much of this year until last week’s sharp rebound. Weekly closes and latest on the Nasdaq (ticker symbol: MPPP):

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Thursday: $18.25, down 63 cents

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Source: Bloomberg News