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Napster Ruling Changes Nothing

Monday's ruling against Napster in a federal appeals court clearly had an immediate and dramatic impact on shares of two other Internet music companies. Less clear is what some investors were thinking.

By the time Monday's final trading bell rang, the two top gainers on the Nasdaq were EMusic.com and ARTISTdirect , which rose 69.2% and 40.0%, respectively. Another online music company, MP3.com , saw its shares climb a healthy 8.1%. Trading volume for all three was much higher than usual.

Maybe these traders are just knee-jerk opportunists. If so, they are in for an unpleasant surprise, for none of these three companies will benefit from the court's move to uphold a lower-court ruling that Napster encourages and abets copyright infringement. In fact, the decision underscores the obvious - that the five major music publishers are in the process of winning the legal fight to control the distribution of their copyrighted material over the Internet.

Further, the three public Internet music companies mentioned above aren't exactly poised to exploit any openings, legal or otherwise. Despite Monday's huge advances, EMusic.com was valued at $0.69 per share and had a market capitalization of $29.7 million, while ARTD was worth $0.88 per share with a market cap of $32.2 million. Both are closer to Nasdaq de-listings than profitability.

MP3.com has a bit healthier profile, with a closing price on Monday of $4.59 per share and a market cap of $314.8 million. But like Napster, MPPP has been crippled by its court battles with the music publishers. Due to settlements with Warner Music Group and BMG Entertainment, plus a court loss to Universal Music Group, MP3.com owes the music publishers more than $300 million. Even without that burden hanging over its head, MPPP also is bleeding heavily.

And should these companies survive, they never will be anything more than pawns for the music publishers, and pawns make for poor investments.

The music industry will never be able to fully stop consumers from downloading songs for free on the Internet. That genie is out of the bottle, and already there are alternatives to Napster such as Gnutella and Napigator. But even genies can be sued.

I've said this before, and I'll say it again. Investors who really want to lay bets on Internet music players need look no further than the five big music publishers - Vivendi Universal's (NYSE:V) Universal Music Group, AOL Time Warner's (NYSE:AOL) Warner Music Group, Sony's (NYSE:SNE) Sony Music Entertainment, EMI and Bertelsmann's BMG Entertainment. They have the money, they have the might, and they have the goods.