gets spanked

A federal judge gives the record industry a big win in the battle against the online music pioneer.

Published April 28, 2000 9:52AM (EDT) rolled the dice and lost. Friday a federal district court judge ruled against the online music pioneer, finding it guilty of copyright infringement.

The case was brought on behalf of the five major recording labels by their trade group, the Recording Industry Association of America. The RIAA had asked for a summary judgment in the case; Judge Jed Rakoff, of the Southern District of New York, in a three-sentence release, agreed. He said no trial was needed to determine the facts of the case. His full written statement will be released in two weeks. is planning an appeal. "New technologies for delivering music are here to stay, and the technology trend is moving in only one direction: forward," said a defiant Michael Robertson,'s founder and CEO.

MP3 is the common name for a computer format that compresses large sound files down into a size easy to download from and swap over the Internet. The decision is a major victory for traditional record companies, which have been scrambling to make sense of the MP3 technology revolution and its impact on music piracy.

The suit was directed at a part of the Web site called Beam-It. The site allowed customers who bought a CD at an affiliated online retailer to have the physical CD mailed to them as usual, but also, by means of an automatic proof-of-purchase system, to gain access to a digital online version. The company reportedly uploaded more than 40,000 CDs; that action was the focus of the RIAA's legal attack.

The next phase in the legal battle concerns damages. The RIAA, citing current copyright statutes, asked for the maximum penalty of $150,000 for each CD illegally copied by into its Beam-It database. This could run into the many billions of dollars. But since the minimum allowed under the same statutes is $200 per title, the judge has a wide latitude. "That's the worst case scenario: The judge decides $10,000 is not unreasonable and the company goes out of business," says Nitsan Hargile, senior Internet analyst for Kaufman Brothers and a strong proponent. He hastens to add, however, that he doubts that will occur.

While is considered healthy by dot-com standards (it boasted smaller-than-expected losses in the first quarter of 2000), its stock crashed 40 percent in just two hours following the judge's noon ruling, from near $12 to just above $6, a new low for a formerly high-flying stock. (Conversely, Liquid Audio, a company whose namesake music-download format is more secure than MP3, saw its stock price nearly double in the wake of the ruling, up to $16.) On the eve of the RIAA's suit in January, was trading for $30. Five months ago, it was at $60.'s president and COO Robin Richards scoffed at any suggestion that it file bankruptcy now to protect the company's assets, adding, "Our fundamentals remain good." ( execs were a bit peeved that Rakoff issued his ruling during the middle of trading without providing a full written decision, which might have given analysts and traders more insight into the case.)

The turmoil was set in motion on Jan. 12, when debuted the new Beam-It program. The company went ahead and made copies of tens of thousands of albums so that the records would be instantly available to customers. The move was a boon for, which had been dealing mainly with unsigned artists who put their music up on the company's site in MP3 form simply hoping to be heard. But with Beam-It, suddenly the company was, indirectly at least, associating with major-label acts who'd never given permission for their music to be up on the Internet in that form. argued that its actions were covered by the "fair use" exemption of existing copyright law (i.e., making a cassette or digital copy for one's own personal use). But the RIAA charged, and Rakoff agreed, that needed to get permission from the artists and labels beforehand. Now,'s Beam-It database will likely be dismantled. It's possible the service could continue, but users would then have to upload their titles themselves. So instead of getting instant access to entire albums, they'd have to wait an hour or overnight, depending on the speed of their modem connection, to hear their CDs online.

"The convenience was the beauty," says Hargile. The company was also hoping to turn the highly popular Beam-It service into a paid subscription service. (It's currently free.) Those plans now appear to be badly damaged.

The premise for Beam-It was a smart one, but not necessarily original. "We looked closely at this before, but you need a load of copyrights," says David Pakman, founder of MyPlay, an competitor that works hand in hand with labels to offer listeners access to digital music. "We believe what has done is highly illegal."

Pakman agrees with many in the online music world who questioned the wisdom of's move. "I'm not surprised, because Michael Robertson really created that business on controversy. There's a lot of noise there," he says. "And Beam-It was yet another one of his noise techniques. But I am very surprised he'd allowed himself and his shareholders to face this kind of financial penalty."

Asked hours after the ruling if he had any regrets, Robertson insisted that he didn't, adding, "We knew we were challenging five heavyweights."

As for a possible out-of-court settlement, did quietly drop its defamation suit against the RIAA last month (the company claimed RIAA CEO Hilary Rosen had been bad-mouthing to analysts), and there had been dialogue between the company and major labels. But with the ruling, the labels now enjoy a new position of power.

Additional lawsuits have recently been filed against by artists and publishers also looking for copyright damages. Robertson has expressed reluctance to settle with the record companies, stating concerns that then he'd have no money to pay off publishers and artists.

By Eric Boehlert

Eric Boehlert, a former senior writer for Salon, is the author of "Lapdogs: How the Press Rolled Over for Bush."

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