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November 15, 2000

Deal Settles Suit Against


Digital Music

Music on the Net

Enlisting Congress on Technology (October 2, 2000) Loses Copyright Case (September 7, 2000) Argument Rejected in Music Trial (August 31, 2000)

Ban Napster?

National Music Publishers' Assoc.
Recording Industry Assoc. of America
International Recording Media Assoc.

The online music company agreed to pay $53.4 million to the Universal Music Group of Seagram yesterday in a deal approved by a federal judge minutes before the final phase of their yearlong copyright dispute was scheduled to begin.

With the deal, Universal became the last of the five major record companies to grant a license to to include its catalog in the online music service at the core of its lawsuit against the company. The company entered a tentative settlement with music publishers over similar issues last month.

Analysts said the total of settlements with the other record companies, as well as the Universal judgment, fell within the $170 million set aside for legal costs. But the analysts said that the royalties the company agreed to pay the companies and the publishers each time a song was stored and listened to on the service, called, are steep.

The question now is whether the company can make money on it through a combination of subscription fees, advertising and marketing the data it collects on music fans.

As part of the judgment yesterday, announced by Judge Jed S. Rakoff of Federal District Court in Manhattan, agreed not to appeal the judge's ruling that it had willfully infringed Universal's copyrights by creating an online database of compact discs.

Universal also agreed to buy warrants for the rights to buy about 5 percent of's shares, a modest vote of confidence in the company's future.

The agreement clears the way for to reinstate its Web-based music locker service. The company's travails have been closely watched by both the recording industry and the Internet industry, including Napster, the online music trading service that faces its own lawsuit by the major record labels. shares gained 63 cents, or 19 percent, to $4, after the agreement.

"This provides clear evidence that the needs of rights holders and music fans can be accommodated in the digital music space," Michael Robertson,'s chief executive, said in a statement.

Exactly why the two companies came to an agreement Tuesday afternoon after months of negotiations is unclear. Going into the trial, faced damages of up to $167.5 million as a result of Judge Rakoff's earlier order that it pay Universal $25,000 for each copyrighted CD included in its database. had hoped to escape a huge judgment by arguing that virtually all of Universal's copyrights were invalid.

"Universal Music pursued this case to send a strong message that copyrights will be protected and that copyright owners and artists need to be properly compensated for use of their work," said Zach Horowitz, president of Universal Music Group. "Although we believe our proof at trial would have led to a greater damage award, we are satisfied with the award. It was never our intent to put out of business with a judgment so large that it would threaten their viability as a company."

The law currently allows consumers to store their own music online and listen to it anywhere after those individuals copy their own CD's and upload them to a virtual storage locker, a service provided by companies like Myplay, a rival to

To make its service easier to use, did not require users to upload music. Instead, a user simply inserted a CD into the CD-ROM drive of a computer and logged into's Web site, at which point would automatically put a copy of the music into the person's virtual locker. A user could also buy a CD from an online retailer and listen to it immediately once had confirmed the transaction.

The company suspended the service after Judge Rakoff ruled in April that the company had violated the copyrights of the major record companies by compiling a database of some 80,000 CD's.

Over the last several months, has settled with the Sony Music Group, part of the Sony Corporation; BMG Entertainment, a unit of Bertelsmann; Time Warner's Warner Music Group and EMI Recorded Music, part of the EMI Group. The companies did not disclose the settlement amounts, but analysts estimate that settled for $20 million with each company.

The much larger Universal judgment, which includes $3.4 million in legal fees, represents the number that lawyers said in court would be the most the company could pay in damages without going bankrupt. Although the company may still be required to pay damages to smaller labels, any future payouts are expected to be minor compared with the Universal litigation.

Mr. Horowitz said that Universal had decided to share half of its award with the artists whose copyrights were infringed, regardless of whether or not it was contractually obligated to do so.

Hilary Rosen, president of the Recording Industry Association of America, the trade group that represents the major record labels, said yesterday, "Hopefully this sends a message that it is cheaper to work with the music companies than against them."

Her comments are similar to those record company officials made after Napster, a free music site also sued by the industry, announced in late October that it had reached an agreement with Bertelsmann to become a fee-based service and pay royalties to the major record labels. has argued that its decision to start its service without the record companies' consent was necessary to persuade the companies to provide the licenses necessary to create a service that would allow music fans to have access to their music anytime, anywhere. But analysts agreed the lengthy court battle had cost the company dearly.

"If they can create the celestial jukebox that is the Holy Grail of this industry and come up with a way to make money off of it they've got a huge opportunity here," said Heath Terry, an Credit Suisse First Boston analyst. "But obviously they have had to pay a pretty hefty price."

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