SAN FRANCISCO (CNN/Money) -
Now that the dust has settled from the Recording Industry Association of America's latest salvo in the war on file trading, it's time to assess what the offensive means to investors.
Like most radical efforts -- the RIAA is promising to file hundreds if not thousands of lawsuits against individuals -- this gambit is risky.
First let's examine the RIAA's timing. The initiative is happening during the summer months, which means the college students that the group typically targets are home, and their dorm computers lie fallow. So the perpetrators the RIAA rounds up will likely be "normal" folks, as opposed to those freeloading, over-entitled college kids.
But the RIAA and its member companies, which include BMG, EMI, Sony (SNE: Research, Estimates), Universal Music, and Warner Music, had better tread carefully. It's one thing to crack down on college kids; it's another to slap a $15 million lawsuit on someone's mom for making her Barry Manilow collection available to her knitting group.
Clear winners in the brouhaha include, not surprisingly, the RIAA members themselves, by way of the three biggest legitimate music services that license music from the major labels.
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These include Apple Computer's (AAPL: Research, Estimates) iTunes Music Store and Real Networks's Rhapsody service. If the companies behind these services are smart, they'll realize that these lawsuits represent their biggest opportunity yet to add new members. Real Networks and partner companies such as Gateway (GTW: Research, Estimates) (which licenses major-label music through Rhapsody for its new PCs) should launch ad campaigns to coincide with the first lawsuit announcements, alerting customers to their legitimate alternative.
And if I were Steve Jobs, I'd light a fire under my iTunes development and licensing teams and demand that the Windows version of iTunes be ready in time for the first lawsuits. If it's not, Apple will have squandered perhaps the best opportunity to port its success with iTunes over to the Windows platform.
For the ISPs of the world, such as AOL (AOL: Research, Estimates), Comcast (CMCSK: Research, Estimates), Earthlink (ELNK: Research, Estimates), and Verizon (VZ: Research, Estimates), the timing is double-edged. Verizon recently lost a suit in which the court ruled that the company must release the identities of its song-swapping users. Although Verizon is appealing the decision, the appeal won't be heard until September -- likely after the RIAA lawsuits are announced.
That's one big reason for the RIAA's timing: It has a window of opportunity during which the ISPs must hand over subscriber data, per the court's decision. So, for most ISPs, the "good news" is that they won't have to foot massive legal bills contesting the RIAA's right to demand customer data -- Verizon is doing that for them. Of course, subscribers will be plenty angry at any ISP that turns them in.
The last sector that could stand to benefit from the RIAA activity, although not as directly as the legitimate services listed above, are the manufacturers of blank CDs, like Iomega and Memorex, and CD-R drives, like Hewlett-Packard (HPQ: Research, Estimates) and Hitachi (HIT: Research, Estimates).
"If people can't use the network, they'll resort to the sneakernet," says Phil Leigh, an analyst with Raymond James & Associates, referring to the term used to describe people physically walking discs to another user in, say, a dorm room.
"People have gotten used to listening to songs in the order they want, and they'll want to continue to do so even if they can't get the individual songs from file-trading programs."
Most of the news coming out of the digital music camp this summer will likely focus on outraged citizens being sued for millions of dollars. Trust me: It will be one of the biggest stories of the late summer.
But investors should read between the lines and watch how the legitimate music services and their partners react to the opportunity -- it's a big one.
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