UPDATE 5:15 p.m. In a move that underscores the waning significance of CDs, the EMI Group has spoken to the other three major music labels about taking over the company's U.S. music distribution, according to two industry sources.
EMI, which represents artists such as The Beatles and Coldplay and makes up about 8.2 percent of U.S. album sales, is looking to outsource distribution to one of its three larger competitors: Universal Music Group, Sony Music, or Warner Music Group, according to two sources familiar with the talks. EMI's representatives met with one of the labels as recently as this week.
The two sources disagreed on whether EMI is considering whether to give up digital distribution. One of the sources said that it's not unusual in the current economic climate for all the top labels to discuss outsourcing the "non-core" part of their businesses. According to this source, EMI is discussing only the physical "pick, pack, and ship" part of its distribution and the plan doesn't include sales or marketing functions.
A spokeswoman for EMI declined to comment.
That EMI is even considering a plan to turn over U.S. distribution to its main rivals is likely a result of the label's precarious financial situation and also an indication of how physical distribution is losing significance in the digital age.
EMI reported last week that the company's losses more than doubled in the year since Terra Firma, a European private equity firm, acquired the U.K.-based music label. The company also badly missed its targets for digital revenues. It forecast 51 percent growth but achieved only 29 percent.
Doing away with U.S. distribution could mean huge savings for EMI, said one source. It also could mean a loss of prestige as well as control.
Music distribution is a broad term and means everything from trucking CDs to retailers to deciding which acts to feature in advertisements at Wal-Mart. Historically, each of the majors has paid big sales and marketing staffs to help with these chores.
Most revenue generated by the top labels still comes from CD sales but they've been in decline for years, ever since the digital revolution began going mainstream. With CD sales in decline and with record stores disappearing around the country, the big music companies may be questioning the efficiency of operating their own distribution units.
All four majors have outsourced some parts of their businesses in recent years. For example, each has stopped pressing its own CDs.
But operating a U.S. distribution system is what major labels do. This is one of their main links to retailers, and by extension, to the public. It plays a part in how music is showcased in stores. Does EMI--should it give up its U.S. music distribution--become in effect just a large independent label?
A fitting anthem for Michael Robertson these days would be The Rolling Stones' hit, Get Off of My Cloud.
For nearly a decade, Robertson, the often controversial cofounder of MP3.com and Linspire, has toiled to store music in the cloud, the term used to describe the seemingly limitless amount of data and services accessible with a Web browser. But in the past, Robertson's efforts have led him into epic legal battles with the music industry. That's where he finds himself once again. In November, EMI filed a copyright suit against him and his music service, MP3tunes.com.
Michael Robertson says corporations can't dictate what music buyers do with their legally purchased songs.
(Credit: Michael Robertson)More recently, Robertson has had to watch competitors generate headlines with an idea he helped pioneer. On Monday, Lala.com launched a service that enables customers to upload songs into digital music lockers (or the cloud) and then stream the tracks to Web-connected devices. Before launching, Lala obtained licenses from each of the top four recording companies. The differences between MP3tunes and Lala are many but chief among them is this: Robertson doesn't believe services such as his are obligated to obtain licenses to help consumers store legally owned music.
There's potentially a lot at stake here--that is if you believe all our gadgets will one day connect to the Web, and that people will access music from celestial jukeboxes via whatever device is handiest. How Robertson's legal case is decided could help determine who owns the keys to digital lockers.
EMI says issue is piracy
Little in EMI's complaint indicates that the label objects to the storing of music in lockers, digital or otherwise. As a matter of fact, the document reads like a run-of-the-mill piracy complaint.
EMI, the smallest of the top labels, alleges that Robertson has set up his two operations, MP3tunes.com and Sideload.com, to deliver a one-two punch against copyright. According to EMI's complaint, Sideload finds and organizes links to pilfered music files on the Web. MP3tunes then enables those pirated files to be stored, copied, and downloaded to devices without paying a dime to the music creators.
"Next to each Sideload song is a small "SL" icon," EMI wrote in its complaint filed in U.S. District Court in New York. "When users click that SL icon, MP3tunes makes a full permanent copy of the desired work and stores it in a locker assigned to that user at MP3tunes.com."
The record label accuses MP3tunes of then handing users the ability to share access to their music lockers with anybody. According to EMI, MP3tunes only requires customers to submit an e-mail and password to access their music. EMI lawyers argued that such lax security enables a locker to become a "virtual drop box for this illegal distribution."
Robertson dismisses EMI's claims and said Sideload is nothing but a search engine just like Google and Yahoo. The Digital Millennium Copyright Act protects service providers from responsibility for any crimes committed by users, Robertson said. He claims EMI's lawsuit is designed to camouflage the record industry's true goal, which is to prevent him and anyone else from storing music in digital lockers without first paying licensing fees.
"This is about what users are allowed to do with their music," Robertson said. "Are they allowed to put it on their phone and their game devices or on multiple PCs without paying the labels each time? I say they are. Consumers don't want a corporation deciding for them what they can do with their property."
To help prove that MP3tunes violates copyright law, EMI is focusing its legal attack on the way MP3tunes stores music, Robertson said. Before I get to that, there are some things about Robertson readers should know.
Is MP3tunes different than MP3.com?
First, this is certainly not his first court fight. He was one of the cofounders of MP3.com, which attracted a huge following in the late 1990s partly by doing what MP3tunes.com does now. MP3.com's Beam-It program enabled users to load CDs into online lockers and access the songs from Web-enabled devices. The problem was 10 years ago many people were still limited by 56k connections.
It just wasn't feasible to upload music this way, Robertson said. In order to speed up the process, MP3.com purchased $1 million worth of CDs and created software to scan a user's hard drive. The software detected whether a user owned copies of songs found in MP3.com's library. If they did, the service gave the user access to its copies.
The labels zeroed in on this. Universal Music Group alleged in a copyright suit that MP3.com was unauthorized to use its songs as a data base. In a landmark decision, the judge agreed and MP3.com eventually paid UMG more than $53 million. Then the company, which had raised $370 million in a 1999 public offering, merged with Vivendi. Later, its domain name was sold to CNET, publisher of News.com.
"The court found that MP3.com had engaged in willful acts of copyright infringement," EMI wrote in its latest lawsuit, adding that Robertson ultimately started MP3tunes.com as a "vehicle to achieve a comparable infringing purpose."
Again, Robertson shrugs off EMI's charges. He said his company is clean. Technology has improved and he doesn't have to create a central music library. Users can create one for him by uploading their own songs. But wait. Is it legal to manage a central music library without permission from the copyright owners regardless of who stocked the library with songs?
Unauthorized performances
Let's step back for a second. It's incorrect to think of digital music lockers in the same way one thinks of a high school locker, says Robertson. Music uploaded into the site isn't tucked neatly into some walled-off area. Songs from every customer are loaded onto the same hard drive, he said. But it's important to note much of of the music is never actually stored, Robertson acknowledged. It would be inefficient and expensive to store numerous copies of, say, The Beatles' classic "Yesterday" or AC/DC's "Back in Black."
MP3tunes keeps a copy of a particular song and distributes that one to customers over and over again. This means, however, that the files users load onto the site are unlikely to be the same ones they hear when accessing their music. Every company handling digital information operates the exact same way, Robertson argues. Nonetheless, EMI claims that MP3tunes is not authorized to distribute music this way and is violating copyright law.
"If EMI is right, their argument indicts every single online storage service and ISP in the world," Robertson said. "We didn't invent this technology. That's a default feature in every single storage system."
Robertson has a point. How much sense does it make to store 10,000 copies of the 10,000 most popular songs? If the copies are exact, what's the difference whether I'm listening to my bits or someone else's as long as I legally purchased the music? Don't I own the right to hear the song?
EMI's attorneys will almost certainly argue that a user purchases a set of bits and they only own the right to those bits.
The label is also likely to compare MP3tunes to MP3.com and claim that in both cases Robertson operates a music data base without permission from the copyright owners. The only difference is that MP3tunes didn't actually make any of the copies on the site.
It will be interesting to see whether that's enough of a distinction to satisfy the courts, especially when Robertson has acknowledged customers of MP3tunes, like those of MP3.com, aren't listening to their own music files.
Michael Robertson, MP3tunes founder, got some good news from a judge. His company wasn't as lucky.
(Credit: Michael Robertson)A federal judge has dismissed a copyright-infringement lawsuit filed by EMI Group against Michael Robertson, founder of MP3tunes.
The bad news for Robertson, who also founded MP3.com and Linspire is that the judge allowed EMI, one of the four largest recording companies, to continue to pursue the copyright claims against MP3tunes, court documents show.
The case, filed last November in U.S. District Court for the Southern District of New York, was brought by 14 record companies and music publishers affiliated with EMI.
MP3tunes enables users to store music in the so-called cloud. The company's 150,000 customers upload their music into "lockers." They can then access the tunes from nearly any Web-enabled device.
EMI argues that MP3tunes doesn't have authorization to exploit the company's music this way. A representative from EMI couldn't be reached for comment late Wednesday evening.
Few in Silicon Valley know their way around a courtroom as well as Robertson. After founding MP3.com, which also enabled users to upload songs into digital music lockers, the major labels and publishing company took him to court. What's unique about EMI's most recent suit is that the recording company went after him personally.
"Suing CEOs personally is a nasty tactic media companies are engaging in to intimidate individuals," Robertson said in an e-mail. The tactic forces them to "either enter into a settlement or face the possibility" of financial hardship.
District Judge William Pauley said in dismissing the case that he didn't have jurisdiction over Robertson in New York. As for the continuing fight his company faces against EMI, Robertson said "the case against MP3tunes will determine if it is permissible for consumers to store their music in online commercial services for everywhere access, directly analogous to the way they currently store documents, photos, and other personal data in cloud services."
Update Sept. 25, 4:47 a.m. PDT: MySpace and the four record labels have officially unveiled MySpace Music.
NEW YORK--Media mogul Rupert Murdoch will officially take on Apple CEO Steve Jobs on Thursday.
That's when MySpace is expected to launch MySpace Music, the music service formed by the world's second largest social network and all four of the largest recording companies, executives from the News Corp.-owned social network said Wednesday.
MySpace executives said the EMI Group, which took much longer to join the venture than its three competitors, will make its entire music library available to the venture. MySpace has also partnered with Sony ATV, which partners with indie distributors like The Orchard, Alternative Distribution Alliance, Caroline, RED, and Fontana.
The service represents the most significant challenge to Apple--at least in terms of firepower--in some time. This is the first time the top labels have all joined in taking a stake in an iTunes competitor.
A MySpace Music playlist.
(Credit: MySpace)Among the many challenges the service faces is that it offers no hardware solution. Apple can provide everything a music listener needs--hardware and software. MySpace hasn't attached itself to any popular music player, primarily because the iPod has such a huge market share. MySpace will sell songs, which will come from Amazon, in the MP3 format. This means they are not locked in digital rights management and will play on the iPod and most other devices.
MySpace has long been an Internet concert hall, where bands went to market their wares to the Web, and that's a big part of the reason why the Los Angeles-based site rose to fame in 2004. According to MySpace, 65 percent of its users already have streaming music on their profiles and six billion songs are played every month. On the flip side, neither MySpace nor News Corp., has much experience in music retail; consider that Apple has zoomed past Wal-Mart to music retail's top spot. Some critics have said that something like MySpace Music should have been in place on the site years ago.
But after reviewing the site with the help of Steve Pearman, MySpace's senior vice president of product strategy, it's clear the site has a few things going for it.
The coolest thing I saw was the site's streaming music player. A person can search for music from all four major labels, drag as many as 100 songs into a playlist area and then listen to complete songs without paying a dime. Of course, the music is restricted to PCs and can't be downloaded to mobile devices. Sites like Imeem and Last.fm (owned by CBS Interactive, which publishes CNET News) also have significant head starts in this area, and streaming playlists are integral to the distribution strategy at iLike, another music start-up that has a very close relationship with MySpace rival Facebook.
What MySpace doesn't do is send users to another site to buy. On MySpace Music, the music listed on an artist's profile page will have "Add" and "Buy" buttons. A user can either hit add to include a song to a playlist or hit buy to instantly purchase the music. Amazon users won't even need to create a new purchasing profile. They can use their existing accounts.
The inaugural advertisers on MySpace Music are McDonalds, State Farm, Toyota, and Sony Pictures Entertainment--which will, conveniently, be advertising on all MySpace Music playlists for a week with ads for its forthcoming teen flick, Nick and Norah's Infinite Playlist. That's just a little too perfect.
In addition to advertising support, marketing campaigns, (Toyota will be giving away free songs on Tuesdays, for example) and the Amazon MP3 partnership, MySpace Music will also sell ringtones through a partnership with Jamster. Some speculated that concert tickets and merchandise would also be sold somehow through the store, but that's not present at launch.
MySpace now has more than 120 million users worldwide, according to ComScore.
CNET News' Caroline McCarthy contributed to this report.
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