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AllofMP3.com may hail from Russia, but the rebel retailer is the North Korea of the music industry. The record labels accuse it of online piracy and hate what it does, but only now are they figuring out how to deal with this internet phenomenon.

AllofMP3.com logoAllofMP3 denies the copyright theft claims: it obeys the laws of its country, owner Mediaservices says, and that is good enough for the company. But it is beginning to lose its sang-froid just a little.

In its current form, AllofMP3 would certainly be unable to operate in any western country that we can think of. For it does not have permission from the labels to sell the music it stocks. The company pays royalties - 15 per cent of revenues - into a local collection society, The Russian Multimedia and Internet Society (ROMS). But this society is not recognised by the international music labels, which will not legitimise it by taking the dough.

As online royalties go, 15 per cent is a nice percentage - for an artist. But add in the label's pigopolist mark-up and it looks somewhat lame. Especially when the retail price is so low.

At prices starting at 3c a DRM-free song - set at Russian levels, AllofMP3 says - a lot of downloads go a little way (if not for Mediaservice, which generates £20m a year, according to industry estimates).

People from overseas are not encouraged to use the service - (so why the foreign language versions?) - but if they do it is their responsibility to ensure that they comply with the laws of their own country, says AllofMP3. And flock from abroad they do. With 14 per cent market share, AllofMP3 is, for instance, the second biggest music retailer in the UK, behind only the ubiquitous iTunes. And unlike the renegade P2P services, such as Kazaa in the days before it was castrated, it is unclear if British consumers are breaking local laws by using the service.

Hard time

But the music industry wagons are beginning to circle. In Russia, the International Federation of the Phonographic Industry is suing the company's owners in the Moscow courts over copyright abuse. If AllofMP3 is obeying its country's laws, then it has nothing to fear on this score. A more vexing challenge is presented by the recent intervention of the US government in the dispute. Two weeks ago, US trade representative Susan Schwab publicly attacked AllofMP3, declaring: "I have a hard time imagining Russia joining the WTO with a website like that operating."

Such failure of imagination neatly illustrates Calvin Coolidge's boast that the business of America is business. Never is this more true in international trade negotiations and disputes, where America will always go that extra mile for California pear farmers, Lousiana shrimp fisherman, American DRAM producers, Hollywood, and, lest we forget, the music industry. But is the US government really prepared to deny the benefits of American-style globalization to 140m people, who have destroyed many more nuclear bombs than North Korea, or Iran come to that, will ever make. All because of one internet retailer? Well, yes it would.

Schwab's threat was enough to smoke out AllofMP3, which organised an online press conference today to "address issues surrounding the AllofMP3's business model".

Stressing that the company paid Russian taxes and complied with Russian law, Vadim Mamotin, director general, said: "We are troubled by the business dispute and believe that this has hurt our business... we are considering a number of options to address the issues including appealing for direction negotiations with the record labels. As we see it, the record label really have an issue with ROMS, and perhaps, the Russian government. But suing AllofMP3 and enlisting the US government to put pressure on us is not the solution to their problem. They really should view us as an opportunity."

We think this call will fall on deaf ears. Inevitably, Russia will, at some point, however gracelessly, change copyright laws to bring it into the pigopoly orbit. This will remove a crucial prop for AllofMP3. The record labels - see their call to AllofMP3 below - will then seek to negotiate the service into sterility - look at Napster and Kazaa.

Our advice to AllofMP3? Double your prices and make hay while you can, lads. ®

Flip to the next page for the full text of the labels' missive.

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