- A MEBIS article -
Except for "Napster" there is no other company as famous for online music as "mp3.com", the publicly traded (NASDAQ, ticker symbol: MPPP) music service provider who has just lost a big lawsuit brought by RIAA and has several additional lawsuits for the same activity pending, which were brought on by other organisations as well as musicians.
mp3.com started out by telling musicians that they were badly treated by record companies because these either:
or
Instead, mp3.com offered musicians to give them about 50% of the
income from download sales, which suggested that musicians would be
getting 50% of the income generated by their music.
Just the chance to be heard - and maybe get some money led to
thousands of musicians giving their tracks to mp3.com - and usually
those tracks were even given away, since most of these musicians were
so anxious (and felt so misunderstood by the bad and stupid record
companies, radio stations etc.) that they just hoped to at least get
noticed.
It then turned out in 1999 that actually there was not a lot of interest in unknown musicians even in the great new internet-world. mp3.com had some very heavy traffic, mainly from musicians checking up on the songs of their own or of some friends, and had high visitor numbers when they gave away the music of some stars for a short while. These stars (well, actually their record labels) were paid a lot of money for those download rights, typically as much money as could be hoped to really come in as profit by normal sales. By going through mp3.com, the companies and the established musicians got this money as a flat fee without any manufacturing or marketing risks - a good deal in a few cases.
Still, mp3.com had some growth in visitors and advertising income through this, but nothing near to the hoped-for effects. Most people either bought music in stores still or rather downloaded illegal copies, for example by exchanging files through "Napster" and even real clandestine sites - all of them financed by advertising income, often by porn-sites.
Downloads for over 95% of the musicians were terrible - usually in the range of 1 to 5 per month, if any. As one US-record distribution manager (of Allegro Corp, a Portland, OR based distributor with very good market knowledge) put it:
meaning that individual musicians can be glad if they make 10 cents.
For mp3.com this alone would have not constituted a problem at all, since they most probably never really planned to make a lot of money with downloads of music files. Like the illegal sites their income came (and comes) from advertising - and for this they just need a lot of visitors, which can be musicians as well as consumers. And neither the advertisers nor the company are interested wether any individual musician actually makes money from the music posted for downloads.
This also led to steadfast refusal to use any copy protection system for the downloads - if the company had ever cared about the fate of the musicians, they would have accepted that copy protection might just be necessary for musicians to make an income. Of course it could be argued that since most record companies did only begin to understand this in the middle of 1999 when theft through CD-recordables ruined many mid-sized labels in Europe and brought music sales down by more then 8 % overall in many countries. Therefore mp3.com might actually just have been as negligent and stupid as many record company executives.
Be that as it may - the business model of mp3.com was and is based on advertising.
Everyone doubting this should have a look at their public SEC-filings regarding quarterly income - and will discover that advertising income accounted for about 90% of the total gross income, music download sales accounted for about 5% of the income and sales commissions for CD-sales for another 5% of income.
This overall business model gives musicians about 2.5 % to 5 % of the income generated by their music and is therefore about the same as with radio in the USA before the new copyright laws and in Europe under current law.
No wonder that the record companies and established stars did never really get involved with the company except for some cases where mp3.com actually paid huge amounts to give a track away.
The first real signs of trouble surfaced in the middle of 1999 when mp3.com discovered that the public interest in unknown musicians on their site was not sufficient. As a reaction the company tried to make money by offering musicians as "payola"-model. The name "payola" actually came from the scandals of the record business past, when record companies paid radio stations to play certain tunes and talk the songs and musicians up in their broadcasts.
With mp3.com the offer was basically an auctioning off of good placement on the front pages of the website/portal - if you pay enough as a musician, you can be featured artist of the month/week etc... and therefore might have a better chance then someone else at being recognised for your great artistry...
The reaction from most establsihed musicians were bitter and angry, because the company partially dropped their pretense at being the musicians friend with this proposal and showed their goal of making money - no matter how and from whom.
Overall this did not bring the desired effects - and so mp3.com had to look for other streams of income. The company did not get enough well-known musicians on their site to get enough visistors to come back again and again.
In addition, many people complained of the often bad sound quality of some of the mp3-files, which was the result of cheap shareware coding programs and amateur coders, who did not really grasp the problems of good-sounding MPEG-encoding.
Finally, the company came up with a concept to get all those tracks of famous musicians onto their site that they could not get by normal persuasion or other means. They started my.mp3.com, which ostensibly was a convenience feature for everyone:
The idea (ostensibly) was that people would want their favorite
CDs archived on a central server so that they could download them
anywhere (e.g.when travelling ) into their computer and mobile
MPEG-Player instead of carrying the CDs around.
No one actually mentioned that the download would actually be much
more cumbersome and less attractive then carrying the CD around - or
that most people do not have fast modem connections while travelling
- and definetely do not have such connections in their cars.
The reality behind it was that people could claim that they owned a CD, store it with mp3.com - and then give the access to the music to somone else, for example by giving them a password for a small fee (or in exchange for something else). This would enable the exchange of music without payment to the musicians, composers or record companies between many individuals. A perfect rip-off.
Had mp3.com just done this, they actually might not have been in direct legal trouble, since most laws and judges might just not have been able to cope with this new scam. They might be legally responsible for helping theft - but it could have taken years until high courts and some judges (or law-makers) intellectually challenged by the internet-concepts would have understood the scam and acted to protect music and musicians.
But it seems that the company was worried that most consumers would find it way to cumbersome to digitize the music themselves, then upload it to mp3.com and finally occassionally download it to their own systems.
So mp3.com decided to do the digitizing in high quality for the
consumer and save the files on their server.
Now the consumer only had to insert a CD in his computer when online
to prove that he owned it. From this moment he had access to the
music for download.
At the public start of the project, mp3.com had already digitized about 45.000 of the most popular albums of music and by April they had reached 80.000 albums, according to a statement of its CEO Michael Robertson.
It is of course obvious that this is a perfect chance for anyone to borrow a few CDs from friends to make an instant and instantly accessible copy, which of course could then be sold to others privately. my.mp3.com would continue to earn money, because the customers of the private seller would have to visit mp3.com to download the track.
What mp3.com overlooked was the basic writing on every CD - and the basics of copyright law. Most CDs have a very easy to read and clearly worded copyright statement (which actually is just a kind of reminder about the laws) saying that no unauthorised copy is allowed etc..
This means that a commercial copy - which mp3.com's copy clearly is - is strictly prohibited since not even the very restricted "private-copy" exemption could be applied here.
The US-organisation of record companies, RIAA, actually even offered talks about how to find a legal solution and a compromise about the whole concept . Mp3.com did not react to this - and was sued by the RIAA. Later several others including rock band Metallica as well as publishers organisation Harry Fox Agency, sued mp3.com independently, since RIAA does not represent their rights.
Finally - on Friday , April 28, 2000 - the first law suit was judged and RIAA won, which was no surprise to anyone but the bankers and some Internet-freaks backing mp3.com (some having a financial interest in the companies share price).
The judges ruling at this point only makes the legal situation clear - and most oberservers see no chance for the decision being reversed by a higher court since it is absolutely in line with any copyright law. Should mp3.com continue the service, which it seems to plan while trying an appeal against the decision, the damages might just rise even more.
The interesting phase though is only beginning, because there has been no decision on the hight of the damages payment yet. The RIAA is suing for US-$ 150.000 per instance of breach of copyright, meaning per song illegaly copied to the server.
Even if this were actually only paid per album digitized, it would mean overall damages of US-$ 12 billion with the 80.000 albums so far on the server. This would bancrupt the company directly - which most people will not see as a great loss to the world. Most musicians on the service will not miss the non-existant income - and most customers will not miss the legally available material, since they did not download new musicians a lot anyhow.
In an old statement, mp3.com CEO Michael Robertson said that my.mp3.com would "send an explosion through the industry", which it of course did.
Now it exploded into his shareholders faces - and he might be sued for misrepresentation by some shareholders or buyers of last year's initial public offering. I would not be surprised if some people were now actively studying the prospectus again looking at the exact phrasing of some passages.
In his reaction to the ruling, Robertson said that his concept was still better for musicians and record companies then "Napster", which is an exchange service for fileswhich does not place the files on its own server and therefore avoids this kind of trouble.
What he ignores is the basic fact that this doesn't make his crime legal. Yes, "Napster" is a serious threat to musicians income and should be sentenced fast, but this can and will dealt with separately.
A few things should become clear to everyone by the success of Napster and the experiences of mp3.com:
And should you still think that the consumer really wants to own CDs, think again. The majority of people listen to music on radio much more then to their CDs - and the popularity of the services mentioned here also show that most people want only to hear music and mostly buy CDs to get fast access anytime, anywhere. If the avaialability issue is solved by the internet, there will not even be a reason for a download - instant streaming will be enough.
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