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CDNOW Wins Patent on Custom CD Process

Online music store CDNOW Tuesday announced that it has received a patent on its process of creating custom CDs on the World Wide Web.

If it holds up, the patent could give CDNOW (CDNW) a powerful, if temporary, lever over the market for digitally distributed music, which is being pioneered by companies like Musicmaker.com and MP3.com (MPPP).

CDNOW's US patent No. 5,930,768, "Method and System for Remote User Controlled Manufacturing," covers the process of using the Internet to remotely select songs from a database, burn them to a compact disc or other playback media, and ship them to the customer.

According to Ted Hooban, CDNOW's director of digital products, the firm is not out to use the patent as an offensive weapon.

"It's not our intent to do anything destructive to other companies or to force them out of the business altogether. If they are utilizing our process, we will make our best effort to come to reasonable licensing terms," said Hooban, who was formerly the president of SuperSonic Boom, a company that CDNOW acquired in June 1998.

While with Supersonic, Hooban negotiated an exclusive license to a related patent owned by a company called Ergon Technology Associates. That patent, No. 5,592,511, covers a system for creating user-selected recordings at record stores.

Armed with control of these two key patents, CDNOW will be in a strong position to negotiate licensing fees from competitors, according to Mark Lemley, an Internet patent expert at law school of the University of Texas.

Such fees are usually based on a prediction of the revenue value of the product they cover, according to Lemley. But in an emerging market like custom CDs, that figure will be difficult to determine, which could mean that big disagreements could lie ahead.

"My guess is that CDNOW and its licensees are going to have significant disputes and very different ideas about what this patent is worth," said Lemley.

While many analysts believe that consumers will increasingly download music directly to their computers or mobile playback devices, custom CDs are seen as a intermediate solution until broadband connections to the Internet become more pervasive.

CDNOW currently has meager customized CD offerings at its site, and instead does most of its business selling CDs printed by major recording companies. But Hooban said the company expects to accelerate the roll-out of those offerings through partnerships. Although its patent no. 5,930,768 was granted by the US Patent and Trademark Office on July 27, 1999, CDNOW's timed its announcement to coincide with the Webnoize 99 new music conference which opened Monday in Los Angeles.

CDNOW signed a deal on July 13 to merge with Columbia House, the music direct marketer owned by Sony Corp. (SNE) and Time Warner Inc. (TWX). The merger is expected to close by the end of the year.



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