How the Music Industry’s War on Sharing Destroys Markets and Erodes Civil Liberties

Music in the Cloud: MP3.com

1 Leave a comment on paragraph 1 0 In 1997, when the web was still in its infancy, Michael Robertson was a 30-year-old internet entrepreneur running a fledgling search engine business called the Z Company. One day, he was looking at the most popular search terms on the site, and saw a curious new entrant: “MP3.” Robertson recognized this as “the first clue that there was a new trend to look at,”[1] promptly registered the MP3.com domain, and decided to reposition his business as an online music directory under the new name.

2 Leave a comment on paragraph 2 0 Before long, MP3.com had expanded beyond its search engine origins to become one of the first hosting services for online music (“The concept was, we’re gonna be a music site that, crazily enough, actually has music!”). Anybody was free to upload a song to the site, and to make it available to other visitors (after it was scanned by site staffers to make sure it wasn’t copyrighted by another party). Tens of thousands of artists, including many major label musicians, uploaded hundreds of thousands of songs to the site. While there were “a few little skirmishes” between the digital marketing professionals at the labels (who wanted their artists’ music posted for promotional purposes) and the legal departments (who wanted the music taken down), there were no serious legal entanglements; by and large, the marketing factions won out, given the growing site’s powerful role in generating online publicity.

3 Leave a comment on paragraph 3 0 MP3.com went public in 1999, raising over $370 million and setting a new record for internet IPOs. By this time, it was also the biggest music website on the internet, with over six million visitors per month. Yet Robertson envisioned even more for the company, akin to what MyPlay had started doing the same year. “My vision of the future was, all music’s gonna live in the cloud,” Robertson remembers. “But it was a big data problem – how do you get a person’s music collection into the cloud?”

4 Leave a comment on paragraph 4 0 While MyPlay’s Pakman and Camplejohn had rejected the “elegant” concept of automatic streaming because they believed it would require licenses from the major labels, Robertson wasn’t so sure. Why should consumers need permission to listen to the music they already owned, and why should a company need permission to help them do it? In his words, “you should have a right to do whatever you want for your personal needs with your personal property.” So in January, 2000, six months after the company’s IPO, Robertson launched a service called My.MP3.com, powered by a technology called “Beam-it.” The service, which was otherwise similar to MyPlay, allowed consumers to unlock a free streaming version of any song or album merely by putting a CD into their computer’s CD-ROM drive, thereby obviating the need to populate their online libraries by uploading their collections song by song.

5 Leave a comment on paragraph 5 0 In Robertson’s opinion, the service was a boon to the music industry despite its lack of licenses. In the face of digital dematerialization and unbundling, he was extending the value, and therefore the market lifespan, of the CD, providing an incentive for consumers to continue to buy them in the digital age. He had good reason to believe this was true; MP3.com also licensed a private-label version of Beam-it, called “Instant Listening,” to three online music sellers, enabling people who purchased CDs on their sites to listen to the music via the internet while they waited for the CDs to arrive. According to Robertson, all three retailers saw “an immediate boost of twenty to forty percent in their sales, overnight.”

6 Leave a comment on paragraph 6 0 Robertson wasn’t concerned about his service abetting “piracy.” Because MP3.com required that people have a physical recording in order to gain access to music on the site (or purchase a CD from a participating retailer), there was even less risk of fraudulent use than one would expect in an upload-based service such as MyPlay. As Robertson reasoned, “you had to have the CD, with all the audio. Well, you can’t ask for better security than that.”

7 Leave a comment on paragraph 7 0 Unfortunately for MP3.com, the recording industry didn’t agree with his assessments about the service’s legality or its market effects. A few weeks after the service launched, the company received cease-and-desist orders from the major labels, soon followed by a lawsuit.[2] While Robertson still believed his company was legally in the right, he pulled the plug on the new service, “just to show good faith to the record labels.” Nonetheless, they persisted in the litigation, which is unusual; typically, the industry seeks to avoid the possibility of a precedent being set against them. Robertson attributes this change of strategy to his company’s unusually deep coffers: “We had gone public, we had raised a bunch of money in the capital market, and they wanted to take it all. It’s that simple. . . . They know they have big statutory damage award laws, and they can crush people with it, and that’s what they do.”

8 Leave a comment on paragraph 8 0 In May, 2000 – a scant four months after the service had launched – district court Judge Jed S. Rakoff found for the plaintiffs, deciding that, because MP3.com had made copies of the labels’ music in order to stream to its customers, and because these copies did not merit fair use protection, it had therefore infringed their copyrights, and was liable for statutory damages, which were eventually tallied at $53.4 million.[3]

9 Leave a comment on paragraph 9 0 What happened next was both predictable and absurd. Having sued the company to the brink of bankruptcy, Vivendi Universal (the owner of Universal Music Group, the largest major label) purchased it. The media conglomerate paid only $5 per share for MP3.com – less than a fifth of the IPO price of $28 and less than a twentieth of its peak price of $105, despite the fact that the company had revenues of $80 million per year and (unlike most internet companies) was actually profitable.

10 Leave a comment on paragraph 10 0 Though Robertson was ultimately able to walk away from the company with a considerable portion of the acquisition money and the knowledge that his technology would live on in some form (it was used, in part, to power PressPlay, a major label initiative to sell digital music directly to fans), the experience still left him bitter. Not only had he been branded a pirate in the court of public opinion (as well as in a court of law) and seen a substantial percentage of his net worth evaporate, but he had lost control of his company before he could finish building it.[4] More than a decade later, he still evinces both regret and anger when he talks about the sale to Universal. “It was a sad day, really,” he tells me. “Because I had all these great plans, visions, and we weren’t really able to achieve it.”

11 Leave a comment on paragraph 11 0 [1] All quotes from Robertson are from an interview conducted via phone on July 23, 2012.

12 Leave a comment on paragraph 12 0 [2] UMG Recordings, Inc. v. MP3.com, Inc., 92 F. Supp. 2d 349 (S.D.N.Y. 2000)

13 Leave a comment on paragraph 13 0 [3] The full text of Judge Rakoff’s decision is available at: http://www.law.uh.edu/faculty/cjoyce/copyright/release10/UGM.html

14 Leave a comment on paragraph 14 0 [4] Despite having launched several high-profile companies in the years since then, Robertson’s Twitter handle is @MP3Michael – a nod to his continuing public association with the company he founded 15 years ago, and lost over a decade ago.

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