Internet Music Rebellion Is Over

Anybody still harboring delusions regarding the outcome of the battle over
online distribution of music is advised to consider the following news
items:

A New York judge on Wednesday ruled that MP3.com should pay up to
$250 million to Universal Music Group for willfully violating copyright laws
by digitally copying songs from UMG artists for customers to download.

Also Wednesday, Yahoo! announced it has bolted from an alliance of Internet
broadcasters to cut a deal with the recording industry in which the online
portal giant will pay royalties for the music it makes available over the
Internet.

And last week, German entertainment conglomerate Bertelsmann completed its
yard-sale buyout of CDNow, a great music Web site that has been a disaster
for investors.

The game is over, and the powerful music industry has routed the ‘Net
upstarts. Should anyone tells you otherwise, run the other way, especially
if they want you to invest in an Internet music company stock.

If you doubt me, just sift through the smoldering rubble. Through Thursday
morning trading, MP3.com shares are down 90% from their first-day closing
price of $63.31 in July 1999. With a market capitalization of $445 million
and shrinking, it might not be long before MPPP is worth less on paper than
the damage award it must pay.

Then there’s musicmaker.com , which also went public in July 1999 and closed at $23.94 on
its first day of trading. HITS spent most of August below $1 per share, and
how has a market cap of about $35 million.

Another online song distributor, Emusic.com , was trading
Thursday at $2.31, or 92% below its all-time high closing price of $29.13
set on June 1, 1999.

Meanwhile, privately held Napster will be back in court Friday, when the
RIAA files a brief in a San Francisco federal court in its effort to shut
down the site.

Napster is appealing a judge’s injunction handed down in July that prevents
it from allowing users to trade digital music over the Web. It is, however,
an exercise in futility, for Napster is Public Enemy No. 1 to the music
industry and will be litigated into oblivion.

The recording industry is gaining control of the Internet distribution
network by aggressively successfully defending its intellectual property.
This should come as no surprise, for as desperately as some people may want
to believe otherwise, the Internet has not magically rewritten copyright
laws. The music publishers know this, and the courts are consistently
upholding their rights.

That’s why Yahoo! finally cut its own deal with the Recording Industry
Association of America. The company had been part of an Internet
broadcasters’ alliance negotiating with the RIAA over royalty rates. The
RIAA reportedly wants 15% of revenue generated from Internet broadcasters,
while the Digital Media Association thinks that is an outrageously high
amount. (Welcome to the world of music publishing.)

One DMA lawyer speculates that Yahoo struck a sweetheart deal with RIAA,
possibly closer to the 3.5% sought by two other industry groups that
represent songwriters and music publishers. I guarantee Yahoo is paying at
least 10%, because company executives know the RIAA will be unyielding in
its demands.

The poor performances of Internet music stocks aren’t all due to legal
battles with the music industry. CDNow, for its part, was done in by
competition from Amazon.com. (Be that as it may, look who now owns CDNow –
one of the five big music publishers.) Emusic.com escaped litigation by
cutting deals with publishers, while MP3.com had already reached settlement agree

ments with other music publishers before losing to
Universal Music Group.

It is clear, however, that the storm cloud of uncertainty threatening Web
music distributors has blocked out any rays of hope for investors. Still, if
you’re still looking to lay a bet on a winning Internet music player, I’ve
got a tip: Seagram , the parent company of Universal
Music. I hear it just won a big court case.

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