News to face hurdles
August 29, 2000: 5:50 p.m. ET

Despite four legal settlements, Web music firm faces battles with others
By Staff Writer Franklin Paul
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NEW YORK (CNNfn) - The legal headaches for will soon be coming to an end, but the two-year-old online music service still has several formidable hurdles to clear.

Bolstered by partnerships, lawsuit settlements and innovative product ideas, is within reach of its goal of becoming a primary player in the online music arena. But this week, the embattled company's stock continues to languish near its all-time low, just as it begins what could be its toughest fight.

graphicOn Monday, San Diego-based, which had revenues for the first half of this year of $38 million, began yet another confrontation with the music industry, this time a one-on-one fight against Seagram Co. (VO: Research, Estimates)

The $12 billion conglomerate's Universal Music Group, the world's largest record company, went into a U.S. District Court in Manhattan on Monday to seek as much as $825 million in damages from (MPPP: Research, Estimates) in a copyright infringement suit. Settlement talks reportedly broke down between the two companies late last week.

In April, U.S. District Judge Jed Rakoff ruled that broke copyright law by creating a database of over 80,000 albums for its service. Launched originally in January, includes components "Instant Listening" and "Beam-it," which allow visitors to stream songs from music they already own from's computers to an online device in any location.

In order to support the service, stockpiled some 80,000 music disks, and stored them digitally for playback to its customers. The music industry charged that did not receive permission from the artists and their record labels to offer such a service, thereby violating copyright law.

So far, has reached settlements with four companies: BMG, which is the music unit of Bertelsmann AG, EMI Group PLC, Warner music group, and Sony Music Entertainment. Warner music, like, is a unit of Time Warner.

Industry sources have said that agreed to pay the four labels about $20 million each, for a total of $80 million. In return, the companies are allowing their music to be used in's database.

"We're always hopeful," for a settlement,'s President Robin Richards said outside the courtroom. "That's what we've been trying to do all along."

graphicRichards said his company could be held liable for infringing on as many as 5,500 Universal albums, although it will challenge Universal's claim on many of those albums on technical grounds later on in the trial. The total number of albums could not be confirmed by either Universal, nor the industry trade group Recording Industry of America.

This phase of the trial will try to establish the company's "intent," or, "the state of mind of the company," according to Jeff Conciatori, an attorney with the law firm Orrick, Harrington & Sutcliffe.

Should the court find that the company violated the law with "willful intent,"

Judge Rakoff would be empowered to impose damages totaling as much as $150,000 per album. That would put damages at $825 million, assuming the number of allegedly infringed works totals 5,500 albums.

Another scenario is innocent intent, which imposes damages of $200 per album, a more manageable sum of $1.1 million.

An spokesman was not available on Tuesday to further discuss the court proceedings.

Legal battles have taken toll on company

Months of legal fisticuffs have taken their toll on The company posted a $150 million charge against its second-quarter earnings for estimated lawsuit costs.

In addition, when the service becomes active, must also pay a nominal fee each time a CD is registered -- when an enthusiast adds a new disk to their virtual "locker" -- and another small fee every time a user listens to a song over the Web.

graphicPerhaps most importantly,, currently a free service, which was seen as an eventual revenue magnet, has lost more than six months of development time.

During that period other companies, such as EMusic and, made large footprints in the online subscription and "music locker" sectors.

Still, Forrester Research media and entertainment analyst Eric Scheirer suggests that, though battered and bruised, will still walk tall if in the end it acquires the right from all five major labels to make their music available on the company's site.

"As long as they come out solvent and with licenses, then it has to be viewed as a good strategy," he said. must then reinvigorate investors, who have shied away from the company's stock in recent months. Shares of fell 25 cents to $8.63 on Tuesday on volume of 200,000, far short of its daily average of 750,000.

The stock, which has a 52-week high just above $64, has languished beneath $10 a share for most of the summer. Investors, optimistic in spurts, were most invigorated in the few days after each of the record label settlements were announced.

Music publisher's suit against still 'ongoing' also incurred the legal wrath of music publishers. The Harry Fox Agency, which represents publishers, alleges that illegally copied the CDs that make up its digital stockpile. A Harry Fox representative had no comment on the status of talks with, saying only that the suit is "ongoing."

graphicExperts suggest that might not wait for a settlement of the Harry Fox suit before it turns major label music service back on. They note that may instead take its chances in court with Harry Fox, which licenses, collects and distributes royalties for the mechanical reproduction of their copyrights. has agreements with the two other significant music licensing houses -- ASCAP, which was signed last year, and BMI, inked earlier this year.

Founded in 1998, has on its Web site more than 562,800 songs from over 87,700 artists - most of whom are unsigned by major labels. Back to top

-- Reuters contributed to this report.

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