INSIDE.com

Wallet Out, MP3.com Finds Many Upturned Hands
After winning over two of the majors, company finds publishers looking to be paid once, twice, three times per recording.
by Warren Cohen

Wednesday, June 14 03:49 P.M.

As a teen sensation, Christina Aguilera gets all the benefits of fame that her hit-generating songwriters Steve Kipner, David Frank and Pamela Sheyne don't. The screaming fans at concerts, Web sites in her honor, MTV appearances with her best girlfriends. But there's one thing that the trio hopes to share with Aguilera: the monies culled from MP3.com in its deal with the Warner Music Group and BMG.

So far, Aguilera's path to Michael Robertson's bankbook is clearer than that of her writers. Last week's pact allows Aguilera, who records for RCA Records, a subsidiary of BMG, to earn royalties whenever her music is stored in and streamed from MP3.com's online locker service, known as My.MP3.com. MP3.com's deal with the record labels has the company reportedly paying the labels 1.5 cents for each track stored in a locker and roughly a third of a cent each time a track is streamed.

But MP3.com's agreement with the two music groups only covers ownership of the sound recording, one of two typical copyrights registered on a musical work, such as Aguilera's ''Genie in a Bottle.'' The other copyright belongs to the song's original composers -- Kipner, Frank and Sheyne -- whose music is published through Appletree Songs and EMI Music Publishing. On their behalf, the Harry Fox Agency, a wholly owned subsidiary of the National Music Publishers' Association, serves as a clearinghouse for these companies and more than 22,000 smaller publishers.

Harry Fox works on behalf of roughly 75 percent of the publishers, including the world's biggest companies such as Warner/Chappell Music and EMI Music Publishing. Any company wishing to use recorded music for a CD, movie soundtrack or television commercial must pay a royalty to Harry Fox or to an individual publisher. The payment, known as a mechanical license because it originally applied rolls of music for mechanical player pianos, compensates the songwriters for their work.

When MP3.com copied tens of thousands of CDs to its servers without legal permission, as a federal judge subsequently ruled, it ignored not only the ownership rights of the major labels but those of the composers and their publishing companies. So on March 14, in an action similar to that of the five major record groups, Harry Fox filed its own copyright infringement suit against MP3.com on behalf of MPL Communications, owned by Paul McCartney, and Peer International Corporation, two of the world's largest music publishers.

Though the complaint mentions by name only seven of their songs found on My.MP3.com, it's seen as a symbolic lawsuit that actually represents the interests of all the nation's music publishers. Until an accord with the publishing community is reached, MP3.com is unable to add any BMG or Warner Music Group content to its My.MP3.com service, notwithstanding its other agreements. Turns out, no Harry Fox deal, no ''Genie in a Bottle'' on your MP3.com service.

Robertson, chairman of MP3.com, says he's pursuing a settlement with the publishers. A rapprochement could cost MP3.com millions of dollars in addition to the estimated $75 to $100 million the company already has earmarked for the record labels, an impending outlay analysts and traders have thus far brushed aside in their delight over the settlement.

Of greater long-term consequence than this one-time payment of damages, though, is a potentially onerous royalty structure that could take hold and come to influence future dealings between online music providers and music publishers. What has been treated as an afterthought in the mainstream press may in fact reverberate throughout the digital music space.


IN THE PHYSICAL WORLD, when a CD is purchased, the mechanical license fee is set by law -- hence it is known as the statutory rate -- at 7.55 cents per song. When your kid sister picked up a copy of the 12-song Christina Aguilera album, approximately 90 cents is going to the songwriters through their publishing companies. For its services, the Harry Fox Agency takes approximately 4.5 percent of the gross monies collected.

Now say your sister wants to make a digital copy of the CD through the My.MP3.com service. Because it can normally take upwards of an hour to digitize a 12-song compact disc, MP3.com decided to save a user's time by having already copied Christina's CD onto its own server; thus, when you pop the CD into your hard-drive, you're flashing it as you would a proof-of-ownership card, and once ownership is verified, you're now entitled to access MP3.com's Christina album as your own via the site. Once you have proved you possess the CD, their Christina music is your Christina music. It's instantaneous fake-uploading, as opposed to drip-drip-drip real-uploading.

However, since MP3.com ripped that CD itself, the company has created what a 1995 addendum to the Copyright Act calls a ''digital phonorecord delivery'' and English speakers call a ''copy.'' This means that the company owes the publishers its mechanical license, at 7.55 cents per song, every time a user stores that song, while the majors collect their 1.5-cent payment. Although only one copy of Christina Aguilera was bought, Harry Fox and music publishers -- as well as the majors -- will collect their money twice, a practice caustically referred to in the music business as double-dipping. (Rival storage service MyPlay requires you to spend the hour and physically upload the CD to your locker, thereby avoiding the payment in question).

If you're MP3.com, the math appears daunting. Before major label content was voluntarily disabled in May in light of the majors' lawsuit, My.MP3.com had 500,000 users. If each user stores 10 CDs in her locker, at 12 songs per CD and a license fee of 7.55 cents per song, MP3.com's annual bill on those publishing royalties alone would come to $4.5 million. Couple this with yearly royalties due to the record labels -- estimates range from $3 million to $11 million -- and you begin to grasp the Sisyphean challenge that any company faces when they try to change the molecular structure of the music business.


HARRY FOX, HOWEVER, may not be content with mere double-dipping. In fact, they may press forward and attempt to collect the death-defying triple-dip. The final third of their royalty-collecting power trio revolves around streaming.

Once that Christina Aguilera album is stored in a locker, your sister will, it stands to reason, want to listen to it. According to reports, MP3.com will pay the labels roughly a third of a cent each time a track is streamed. If your sister listens to the melismatic overload of Christina's ''I Turn to You'' 20 times, MP3.com must pay RCA roughly 7 cents. Because a stream, like a terrestrial radio broadcast of a song, is considered a public performance, MP3.com will also pay a fee to performing-rights societies Ascap and BMI, which eventually gets distributed to the publishing companies and their songwriters. To make matters worse for MP3.com and its ilk, Harry Fox contends that they too should receive remuneration every time a song is streamed.

Harry Fox and music publishers base their me-too claim on the notion that songs digitally streamed by interactive services such as MP3.com constitute ''digital phonorecord deliveries,'' even if no digital copy is, or can be, made by the user. Moreover, Harry Fox, like the major labels, say that locker services could depress future music sales. Whenever an online audio service begins to threaten a potential CD sale -- say, in the cases of customizable radio channels or proposed subscription services that offer users the ability to hear the songs they want on demand -- the music industry demands payback. ''If it's going to replace sales, publishers are adamant in expecting payment,'' says Bob Kohn, chairman of Emusic.com and an expert on music licensing. ''The law states that if a service is interactive and listeners can hear any song they want, it requires a license.''

Publishers argue that there are three ways locker services could substitute for sales. First, locker services have some security holes which allow people to share CDs. For example, a My.MP3.com user can borrow a CD from a friend to beam into the service to gain ownership and access to the recording. Some hackers have proved adept at capturing streamed music, saving it as downloads and sharing it among friends.

And on technical grounds, some publishers say a stream is actually a digital copy. The copy is temporarily created, the argument goes, when a song passes through routers and switches or when a computer's RAM buffer holds the song as it streams to a user, even though the computer bits that form the music disappear with every subsequent song.

Right now, music streamers on the Web pay a performance-rights fee to collection agencies Ascap, BMI and Sesac, plus a fee to the labels themselves. Conversely, terrestrial radio stations do not have to pay fees to the labels. If Harry Fox is successful in getting online music firms to pay a streaming fee, then composers would essentially collect two payments for one play, and MP3.com would be paying in duplicate.

And while it seems obvious that a stream can't be both a performance and a copy, neither Ascao/BMI nor Harry Fox is willing to give in. (The only known instance of such an occurrence is the law that covers old-fashioned jukeboxes.) ''It's a power play,'' says Whitney Broussard, an attorney at Selverne, Mandelbaum & Mintz. ''And MP3.com is caught in the publishers' battle.'' Parties on all sides of the issue agree that the digital money-grab is far from being resolved. ''The technology is so outstripping the current state of the law, nobody really knows how technology currently applies to the Copyright Act,'' says Stephen Rodner, a partner at New York's Pryor Cashman Sherman & Flynn.


IN A KEYNOTE SPEECH at Tuesday's Streaming Media East 2000 conference, MP3.com CEO Robertson affirmed his intention to keep the My.MP3.com service free-of-charge to consumers. But faced with the numbers above, not to mention an inevitable payout on damages to Harry Fox to settle the suit, it's difficult to see how advertising alone can cover the cost of the service, no less help the publicly traded company turn a profit.

Last year, MP3.com's total revenues were $21.9 million, 94 percent of which derived from advertising, while the company lost $42.5 million. Even if MP3.com changes its mind and charges its 500,000 locker customers an annual subscription fee of, say, $9.99 -- similar to their classical music service -- that would bring only an additional $5 million in revenue; in contrast, the royalty fees to labels and publishers may be nearly double that amount. Of course, with a presettlement bank account of more than $300 million, the company is better suited than most to withstand such a siphoning.

The potential bounties for the publishers and labels have other copyright interests licking their chops, as well. MP3.com is protected from any legal action brought by public performance rights groups because it already has deals with Ascap and BMI. But the pact with Ascap, the world's largest group representing 80,000 composers, was inked a year ago when MP3.com only had a motley collection of music from unknown artists. Now that it will add hit music from two of the Big Five, some industry insiders expect the group to renegotiate for higher rates. ''There is an opportunity for periodic review of the amount of our deal to take a look at what kind of music MP3.com is playing and how much is being used,'' says Marc Morgenstern, Ascap's executive vice president in charge of new-media relationships.

For composers, an unsung and undercompensated caste of the music business, the spoils of the unfolding digital music sector may be greater than they ever dared to imagine (or, as one experienced executive put it, ''at least that's true for the publishing companies''). But what's good for publishers may not be so beneficial for the nascent online music industry. Emboldened by their leverage with MP3.com, music publishers could yet try to throw their weight around to demand license fees from such companies as online storage service MyPlay and interactive radio destination SonicNet, neither of whom currently pays Harry Fox.

''Most people think their position is ludicrious,'' one online executive said of the agency, ''but they'll push for everything they can get.''