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Legal digital music is commercial suicide

Fans suffer as lawyers get rich

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Opinion Lala, for those who don't know, is a free streaming music venture. Invested in by Warner Music group to the tune of $20m it streams about five million songs, but also offers 89 cent MP3 sales, and song rentals for 10 cents each. But why is almost nobody using their well-designed, expansive, free streaming service?

I'm not talking about the song rentals for 10 cents - we all knew that was a non-starter. But people aren't streaming songs even for free. While Imeem is streaming more than 1m sessions per day, on Lala only 25 daily listens will get your song into the weekly Top 10. The service just isn't attracting users at all, in spite of the marketing major label WMG has committed to do. Lala appears to be just another in a long list of industry endorsed companies that tries to make the labels happy - and in so doing, apparently forfeits its chance to build a user base or a business.

Over the last decade there seems to be three broad categories of digital music companies:

Firstly, there are companies who actively court label endorsement, and don't do anything the labels don't like. Many agree to pay the labels big fees including substantial million dollar up-front payments. Many of these have raised substantial money, too. They get some nice press articles, but then quietly fade away. If they have label money or executives running their company or influencing the company (instead of net people) then they have never been able to attract a significant user base. Examples include Liquid Audio, a2b, Lala, Pandora, Wippit, Qtrax, Mashboxx, and Nokia's Comes With Music.

Secondly, there are companies who get sued by the labels after attracting a huge audience. They usually succumb to legal pressure and sign licences agreeing to pay the label's big fees including substantial million dollar up-front payments. They may have audiences for their service but it's irrelevant, because the royalty structure ensures they will never turn a profit. Napster, Imeem and the upcoming MySpace music store fits in this category. At MP3.com we were profitable, but the portion of our business which served licensed music was never going to make any money.

Then there are the companies who have been sued, but are proceeding with the legal case rather than settling. If these companies lose their lawsuits they will likely go out of business because of draconian statutory damage rates, which ensure that even if their service is beneficial for the music industry, they are driven to bankruptcy with oversized damage awards. MP3tunes, Veoh, Multiply, Seeqpod and Playlist.com fall into this bracket (although my sources say that Playlist.com's VC are pushing hard for a settlement which would put them in category two.)

Missing from this list is a fourth category, where a true partnership between net companies and the industry is negotiated. A partnership where the digital company provides some benefit to labels or publishers, and in return they get the ability to create a profitable business.

Go legal and die

The internet companies I talk to don't mind giving some direct benefit to music companies. What torpedoes that possibility is the big financial requests from labels for "past infringement", plus a hefty fee for future usage. Any company agreeing to these demands is signing their own financial death sentence.

The root cause is not the labels - chances are if you were running a label you would make the same demands, since the law permits it. The lack of clarity in the law is the real culprit - and it's the huge potential penalties that create an incentive for the big record labels' law firms to file lawsuits. Without clear laws and rulings from the court about what is permissible, every action touching a copyrighted work is a possible infringement, with a large financial windfall if the copyright owner can persuade a Judge to agree.

Fortunately, there seems to be light at the end of the legal tunnel. Two recent US court rulings have added some clarity to several key copyright issues and both rulings were clear victories for the digital company wishing to interact with copyrighted works.

First there was Fox v Cablevision, where a commercial company wanted to provide a remote recording and playback service to its cable customers. Think of it as a centralised TiVo system. The appellate court reversed a lower courts ruling that such a service was a copyright infringement by Cablevision, and each playback was a public performance requiring a royalty payment clearing the way for such a service.

Second was Io v Veoh, which found that Veoh, a YouTube-like service, was protected from financial claims resulting from hosting videos owned by others, because it was acting within a safe harbour of the DMCA. The DMCA offers protection to internet service providers for several actions, including storing material at the direction of the user and linking to works elsewhere.

Both these rulings were significant defeats for media companies and victories for consumers. The depth and detail of these rulings suggest that courts are gaining a deeper understanding of technology issues. It may be that in a few years there will be substantially more clarity on digital media issues, which will be a strong inducement for technology and media companies to create mutually beneficial partnerships rather than engage in costly legal battles.

We're not there yet, but if a few more courts conclude as the California court did in the Veoh case that the DMCA protects online services, this will dissuade media companies from their legal attacks and bring them to a negotiation table.

Michael Robertson is CEO of MP3tunes offering music users personal cloud music storage, so your music can be everywhere you are and which is currently being sued by major record label EMI.

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