2000 Volume 3 Issue 4

IT MATTERS: MP3.com Completes Settlements

IT MATTERS: MP3.com Completes Settlements

Door opens for legal online delivery of copyrighted music.

In the World of MP3 and Napster, it looks like the record companies have made strides towards bringing online music distribution into the copyright fold. MP3.com: On November 14, 2000, MP3.com settled its lawsuit with the last remaining record company plaintiff, Universal Music Group for $53.4 million dollars. This settlement was reached as testimony was about to begin in the damages phase of the trial, after a federal district judge earlier found that MP3.com had willfully violated Universal’s copyrights.

Damages in this phase of the trial could have gone as high as $250 million. MP3.com settled lawsuits brought by four other record companies, Warner Music Group, Bertelsmann A.M., EMI and Sony Music Entertainment for an estimated $100 million earlier this year. In addition, MP3.com arranged licensing deals with each of these record companies. Universal said it was never their intention to drive MP3.com out of business. According to its President, Zach Horowitz, its intent was always to send a clear message that copyrights on the Internet will be protected vigorously and that owners and artists need to be paid for their work.

According to Universal, it welcomes the development of legitimate music businesses on the Internet. In fact, Universal, through the settlement, has obtained the right to buy a stake in MP3.com. MP3.com has won an economic reprieve for now, since the total lawsuit settlements appear to fall within the $170 million the company set aside for legal costs. MP3.com’s long term economic viability remains to be seen. It must still pay for the licensing rights obtained from the record companies and must convince millions of its users to now pay for what had previously been a free service.

Napster: Napster made the news this month as well, striking a deal with one of the same five record companies that sued MP3.com for copyright infringement. In a surprise agreement, Bertelsmann AG’s BMG music arm agreed to settle its lawsuit against Napster if Napster installs a fee-based service that will pay royalties to the copyright holders. Bertelsmann has agreed to give Napster an estimated $50 million loan to help them develop the technology to do this. This agreement with one of the litigants, of course, does not stop the current litigation still pending by the four other record companies. A federal district court granted a temporary injunction which was stayed by the 9th Circuit Court of Appeals. A ruling from the 9th Circuit regarding the copyright infringement issue is expected shortly. Napster is not out of the woods yet. It is not clear that the other four record companies are in the mood to settle their claims and Napster’s settlement with Bertelsmann may have weakened one of their defenses in the case. In these lawsuits, Napster has consistently alleged that they do not have the technology to be able to monitor who is downloading what to be able to charge their “customers”. With this settlement, they are agreeing to do just that. Also, like MP3.com, it is not yet clear whether the nearly 40 million Napster users will automatically agree to pay for a service that has here-to-date been free. Finally, one or more of the existing litigants may refuse to settle and the courts will have to decide Napster’s fate.

Other Technologies for Downloading Music

Meanwhile, dedicated file-traders are downloading all the music they can, as well as trying out new technologies such as Gnutella, Freenet, OpenNap, and more. While all bets are off until the final verdicts are in, other technologies are emerging to take MP3 and Napster’s places should they collapse under the weight of these lawsuits.

For example, OpenNap (http://opennap.sourceforge.net/) servers (privately operated networks running on the Napster protocol but without affiliation with the company) may offer a viable alternative. While they are hard to find, they are still centralized, so operators with a reasonable profile can be found and potentially shut down by the RIAA (Recording Industry Association of America) if the Court rules in its favor.

Gnutella, another Napster replacement-in-waiting, functions by connecting each individual computer to several others which are then also interconnected. Consequently, this network is not centralized at all. Given this architecture, many have argued that it would be difficult to shut down Gnutella. However, half of the content is actually provided by 1 percent of its users, so the RIAA indicates that enforcement is also possible in this arena according to a recent study on ‘Free Riding’ ().

There is also Freenet, a completely decentralized technology with both privacy and anonymity built into the network. Content is distributed around the network of participating computers and encrypted so that people don’t know exactly where a file originated, making enforcement extremely difficult. The problem is that it is also hard to navigate. It is currently used only by the really tech-savvy. Here Comes Flycode – A Legal Business Model for Downloading Music? Billed as “Napster without the lawsuits,” two entrepreneurs “are preparing to launch a Website that they hope will rewrite the rules about how PCs are used for entertainment. Legally.” (Business 2.0, Oct. 10, 2000 p. 220.) Believing that peer-to-peer computing is here to stay, their business plan works with copyright owners, using digital rights management technology, to control the distribution of licensed content obtained through their website. Flycode software would allow users to download content from the network and share files with other Flycode users. These files could contain any content capable of being digitized, including “music videos, move trailers, clips from old films, home videos, (and) personal vacation photos.” (Business 2.0, Oct. 10, 2000 p. 224.) Who will survive? Until the courts’ decisions, it is a waiting game.

Stay Tuned for More Updates!

http://cgi.zdnet.com/slink?/adeskb/adt0907/2625043:5506515 (no longer accessible).

https://gbr.pepperdine.edu/004/ (no longer accessible).


The Data Accuracy Challenge

Marketers offer value for personal data

Lynda Palmer, E-Business Strategist

The electronic age with its abundance of data has enabled us to create effective targeted marketing messages for our prospects and clients. This benefits marketers by enabling the development of individually tailored, highly pertinent messages. It benefits the user by allowing him or her to receive messages pertaining to individual wants and needs.

The downside is that quite a controversy exists among the privacy advocates regarding the use and sale of this information. As consumers, we have been alerted to privacy issues and are cautious about how and to whom we disseminate our information. Many consumers give false information. Marketers collect customer data on their web site and use this information to offer products, services or information that the customer is truly interested in and wants. This leads to a marketers challenge. How can one determine if the data is accurate? Better yet, how can a marketer entice the user to submit accurate data?

The June 1999 Forrester Report on Making Net Shoppers Loyal determined that consumers have three limited currencies; time and money are precious–but well understood, the third currency, data, includes personal details about consumer preferences and buying habits. This third currency is most valuable because it allows a marketer to know their customers. Consumers are more careful with this data as they now know it is worth money to the seller and by exposing it; they are more vulnerable to “marketers intrusions.”

So how does a marketer get customers to “spend ” this currency? Lets look at what two consumer-focused websites offer consumers in exchange for their “currency.”

Net Zero

Net Zero offers free Internet access. Net Zero costs the consumer about ten minutes upfront and asks questions ranging from the basic, name and street address, to household income, what type of vehicle you own, when you expect to purchase a vehicle, and what types of vehicle you expect to purchase. What entices the consumer to input their intentions about car purchasing to receive free Internet service? What entices them to put in the correct street address, income level or other such information? Will their data be accurate?


Topica offers topic-based information via email in exchange for about five minutes of time plus general information such as name, email, and zip code. Consumers choose topics in which they are interested in receiving “special offers and exclusive deals.” Topics range from autos, to food & drink, to investing. Users create their own profile and state that they are interested in certain topics. Topica sends information about those topics to specified users. So for their “accurate currency” (specific interests), consumers are receiving information about topics in which they are interested. Additionally, marketers who offer products affiliated with those particular interests can advertise to an audience who has proactively requested information on a topic.

The bottom line is that the consumer must receive “value” in order to spend “data currency” and the data collected must be relevant to the offering. If one is getting a free Internet connection, what will entice them to input correct information regarding their intentions of purchasing a car? However, if one is interested in receiving information about cars, he or she may go into Topica or other such site and request that information. So, offering value directly correlated with the data is a key area a marketer must focus on to obtain relevant, usable data.

E-Law Update

Law & Ethics Governing Business on the Web

Linnea McCord, JD, MBA

Staying up to date with the constantly changing legal and ethical rules governing doing business on the Internet is no easy feat. Two helpful websites with free resources on E-Law topics make this task easier:

Internet & Technology Daily News

This site contains timely and up-to-date articles on approximately 17 subject areas of elaw, a daily and weekly newsletter on related news topics, and a library of cases, statutes and forms in some of the subject areas.

Sample from the daily newsletter (September 7, 2000) “MP3.com Loses Copyright Ruling, Could Face $250 Million Fine A federal judge ruled that MP3.com, a popular online music site, willfully violated copyright laws, clearing the way for a potentially crippling damage award and providing the strongest sign to date that major record labels are winning control of music commerce on the Internet. U.S. District Judge Jed S. Rakoff in New York said he would fine the company $25,000 for each CD it copied from, a punishment that could yield a total fine of as much as $250 million.”

Read an article on this topic in The Washington Post and BNA Internet Law News

In addition to information on the latest BNA journal reporters on internet legal topics, visitors to this site may sign up for a free newsletter covering E-Law topics.

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Author of the article
Linnea B. McCord, JD, MBA
Linnea B. McCord, JD, MBA, Associate Professor of Business Law at the Graziadio School of Business and Management, Pepperdine University. Dr. McCord started teaching business law and ethics more than 30 years ago, first as an in-house corporate counsel and later as the General Counsel of a division that was part of a high-tech Fortune 500 multinational corporation, headquartered in New York and Paris. Her area of expertise is the critical role Rule of Law plays in the long-term success of economies and countries and why American Rule of Law is unique in the world.
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