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SAN FRANCISCO--Jeremy Riney, CEO and founder of Project Playlist is optimistic he will eventually license music from the big four record companies.

"There is no money in shutting down companies," says Project Playlist CEO Jeremy Riney

(Credit: Greg Sandoval/CNET News.coml)

He continues to harbor these hopes even after three of the four largest music labels filed a copyright lawsuit against his company last month, he said at the MusicTech Summit on Thursday.

What may be helping Riney keep his cool is that he has hired Jay Berman, the former CEO of the Recording Industry Association of America (RIAA) to help shepherd Project Playlist past copyright issues, according to a source close to the company.

Berman is co-founder of Berman Rosen, a consulting firm that he started with Hilary Rosen, another past RIAA chief.

Project Playlist, founded two years ago, aggregates links to music files and then enables users to listen on an embeddable music player that has found a following among MySpace and Facebook users. In the complaint filed on behalf of all the top music labels save for Sony BMG, which is negotiating with Project Playlist, the RIAA alleges that the majority of the links found at the site lead to pirated music.

Riney said that Project Playlist is covered by the Digital Millennium Copyright Act, which protects operators of Internet services from responsibility for illegal acts committed by users. He points out that his company doesn't host any stolen content on its site, nor does it support piracy. Furthermore, Riney said that if he can't license music legally he will shut his site down.

He might take some comfort in knowing that the labels appear to be using litigation as a way to soften up tech companies at the negotiating table.

In two high-profile copyright cases, Warner Music Group sued Imeem and Universal Music Group sued MySpace and both recording companies dropped the suits and licensed their music after receiving equity stakes.

"There is no money in shutting down companies," Riney said. "There is money in licensing companies and licensing opportunities."

Riney says now he must wait to see how the music industry plays its hand. The labels shouldn't wait too long. The advertising-supported Project Playlist, according to Riney, is profitable.

Music players are losing out in popularity to phones that pull double-duty, according to a market research report released Monday.

More than 500 million music phones were shipped worldwide in 2007, which puts that category of device 300 million units ahead of regular old portable music players, according to the report released Monday by MultiMedia Intelligence. The company is forecasting that by 2011, of the 941 million handsets that will ship worldwide, more than half will be music phones. (The report defines a music phone as a handset that plays music files, and has a memory card slot.)

The Walkman-branded W980 phone from Sony Ericsson is a phone but looks like a music player. Phones that play music are quickly outpacing standalone portable music players.

(Credit: Sony Ericsson)

As the developed world begins to be saturated with cell phones, handset manufacturers and wireless operators are forced to look elsewhere to keep their profits up. For leading handset maker Nokia, its secret to staying on top of the competition is its growing business in emerging markets, like China, India, the Middle East, and Africa, according to my CNET News.com colleague Maggie Reardon.

The operators of wireless networks also need ways to increase revenue. So, though not everyone has a need for a data plan if they don't want e-mail on their phone, music is something almost everyone can relate to. Right now the most promising driver of profits on cell phones is music-playing capability.

"Music has been the first 'killer app' for the operators to drive the consumption of premium content on the handset," said Frank Dickson, chief research officer for MultiMedia Intelligence. To that end, MMI predicts the mobile music market will be worth $6 billion by the end of this year. "With such significant revenue and customer demand at stake, the operators' and handset providers' concerted efforts (will) use music as a central part of their handset strategies," the report says.

Update 1:55 p.m. PDT: As several commenters have pointed out below, buying a music phone doesn't necessarily mean it's used for playing music. (Case in point: my own Verizon enV has a 2GB microSD slot, and I've never transferred MP3 files to it. But that's mostly because my iPod earbuds don't work with the enV and I refuse to buy a separate set.) Music-playing ability was formerly a feature reserved for high-end phones, but as the technology gets cheaper, that means that those features will start to filter down to more inexpensive phones, which have always been the majority of the market.

Update 5:30 p.m. PDT: Microsoft plans to announce the second generation of Zune digital music players on Tuesday, according to a source close to the company.

Microsoft Chairman Bill Gates is supposed to take part in the formal announcement of the new music player, the Web site BetaNews reported on Monday. A source with knowledge of the announcement confirmed the report when contacted by CNET News.com.

The upcoming player, which will be available in November, will be the first Zune to feature flash-based memory, BetaNews reported.

The site also said Zune's flash-based players will measure 3 inches by 1.25 inches and the device will look very similar to the iPod Nano.

A Microsoft spokesman did not immediately reply to an interview request.