MP3.com to Pay Universal Music $53 Million

In the largest copyright award of its kind, Seagram’s Universal Music Group won a $53-million infringement judgment Tuesday against the controversial Internet company MP3.com Inc.

The judgment is about half of the $100 million in damages that the world’s largest record corporation expected to collect after a federal court ruled in September that MP3.com had willfully violated copyright laws. At the time of the ruling, MP3.com said it would go bankrupt if forced to pay more than $50 million to resolve the case.

The judgment brings the amount to more than $160 million that MP3.com must pay out to resolve copyright litigation filed by the record industry. The company also has committed to pay significant licensing fees on an annual basis.

For MP3.com, the judgment staves off bankruptcy proceedings, assuming the company can resolve a handful of other pending suits by music publishers and independent labels. It also gives the upstart a second chance to launch its My.MP3.com locker service, which allows users to store songs from personal CDs and access them via the Internet.

For Universal, the $53 million represents about twice what the music giant thought it could collect had MP3.com filed for Chapter 11. During the negotiations, Universal also obtained a promise from MP3.com for tighter security precautions as well as the option to buy about 5% ownership in the San Diego firm.

Analysts still wonder whether MP3.com will survive. Although the company has a war chest that could keep it running, there are doubts about whether it can find a way to cash in on its brand name and develop a successful business plan.

The most surprising development in the deal, however, is that Universal has promised to share half of the legal award with the artists on its labels whose copyrights were violated by MP3.com. Standard record contracts do not require companies to share such damages with artists. So far, no other major record conglomerate has made such an overture.

“The fact is we’ve been saying all along that we were pursuing this legal fight not just for us, but for our artists. This is proof we meant it,” said Zack Horowitz, president and chief operating officer at Universal, the world’s largest record entity.

“The only reason we fought this was to send a message to all the would-be infringers: ‘If you steal our music without permission, you’re going to get socked.”’

MP3.com, a company that has been repeatedly criticized for subsisting on investment capital and operating without a conventional business model, still has many hurdles to get over.

The unprofitable company has already paid out about $80 million in licensing fees and damages to resolve a copyright infringement suit by four of the nation’s biggest record conglomerates. MP3.com also has pledged to pay $30 million to music publishers.

In addition, MP3.com has agreed to pay future licensing fees to both record companies and music publishers. The terms of the licensing agreements, 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 MP3.com fans, who were lured to the site by free streaming and downloading of recordings.

MP3.com was sued in January by Time Warner, Seagram Co., Sony Corp., EMI Group and Bertelsmann for copyright infringement relating to its Internet locker service. The record labels said MP3.com violated copyright laws by creating a database of 80,000 unauthorized albums.

MP3.com rose 63 cents to close at $4 on Nasdaq. Seagram gained $1.69 to $57.06 on the New York Stock Exchange. The judgment was announced during trading hours.