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MP3.com
versus RIAA By
Chris Coyle On Friday, April 28, the Recording Industry Association of America (RIAA) won a victory in the courts after a judge decided that MP3.com (MPPP), a music service providing website, violated the copyrights of several large recoding companies including Warner Music, EMI Recorded Music, BMG Entertainment, Universal Music, and Sony Music. The basis of the lawsuit is centered at the My.MP3.com service, which allows users to load their music CDs on MP3.com for listening on any computer which is connected to the internet. How My.MP3.com
Works
Once you have proven that you own a CD, MP3.com allows you to access the music which has been copied in its database. Since there is no loading or downloading of music, the service is fast and easy to use. Once the music is in your playlist, you can play and manage the files any way you like in your password-protected account. RIAA's Side Hilary Rosen, President and CEO of the RIAA, wrote a letter to Michael Robertson, CEO of MP3.com, that detailed her views on the case. "Simply put, it is not legal to compile a vast database of our member's sound recordings with no permission and no license." She writes, "We regard MP3.com's business choices to be in reckless disregard of the law with serious consequences to the company and its shareholders." She goes on to say, "Your company's actions are unfair to every internet company that takes the sound business step of obtaining a license before making use of another's creative work." She writes that the RIAA wanted to settle out of court, but "your [MP3.com] position leaves us no alternative than to seek redress in the courts. The chairman of eMusic, Bob Cohn, said, "There are no novel legal issues involved here. It's a textbook case of mass copyright infringement." With the ruling on the 28th of April, it appears that the RIAA has won round one. MP3.com's Side John Parres, an agent at Artists Management Group, said, "It encourages people to buy CDs, play music over and over again, and generate additional income streams for artists. It will be interesting to see what the RIAA does." Mr. Robertson wrote a response to Hilary Rosen that stated the My.MP3.com service is "nothing more than a virtual CD player" and is a "new and innovative technology that lets people listen to their music." Mr. Robertson was "disappionted" in the manner in which the RIAA reacted to the My.MP3.com service. "Upon announcing our new service," wrote Mr. Robertson, "we invited your lawyers to come and look at our technology. I called you to extend our commitment to fully disclosing our technology to your lawyers' eyes so that you could understand the extensive efforts that we engineered into the sysem to prevent piracy, counterfeiting and unauthorized coyping and use. We invited you to do this without condition or restriction. After your lawyers cane to our facitily in San Diego and I flew to Washington for the sole purpose of meeting you, the RIAA's response was to shoot first and ask questions later. These are the actions of an industry that is against consumers' rights, against new technologies, and expansion of artists' revenues." Needless to say, MP3.com will be fighting the charges in court. "We're in a heavyweight fight, and there are five heavyweights in the ring against us. We will take shots, but this is by no means the end of the fight." The Market
Reaction Mr. Robertson commented on the market reaction to the news by saying, "We believe that the stock will bounce back because our core fundamentals remain in place." So, now would probably be a good time to look at those fundamentals. Revenues for the three months ending March 31, 2000. were $17.5 million, up from $666 thousand in the same quarter a year ago. Pro forma net loss for the first quarter was $8.4 million, or $0.13 a share. That compares with a net loss of $1.4 million, or $0.05 a share in the same quarter last year. Earnings, however, did improve from the fourth quarter in 1999. The company reported a net loss $10.6 million, or $0.17 a share, on revenues of $15.3 million. Even better, the company, according to Zacks Investment Research, is expected to turn profitable for year-end results next year. Cash, cash equivalents, and short-term securities totaled $369.2 million. The company has no debt, which is always a good thing. The company used up $3 million in cash for operating activities for the quarter. Gross margins increased from 69.1% one year ago to 78.5% this quarter; however, MP3.com says future margins will fluctuate due to any changes in revenue mix and various expenditures. Business Model The company cites 4 main sources of revenue generation:
Also, MP3.com says they will eventually make My.MP3.com a subscribtion-based service to add another revenue stream. Currently, it is free. The Future of MP3.com In the near-term, revenues will not be affected since none of the current revenues derive from the My.MP3.com service. But in the long-term, future potential revenues could evaporate if MP3.com loses the case because it could not benefit from the use of this technology. In its most recent 10-k, the company cites a number of risks associated with the lawsuit:
The RIAA says MP3.com should be forced to pay anywhere from $750 to $150,000 for every illegally copied CD on its servers. Let's do some math. If we average those two figures together, we get $75,375. Multiply that by the number of CDs, 45,000, and we get a grand total of $3.4 BILLION dollars. Wow! Please note, however, that this math problem was just an example. MP3.com could pay a lot more, a lot less, or even nothing at all if it should happen to win. As we can see, this lawsuit has the potential to severly damage MP3.com. The stock market has taken these risks into consideration, sending it from a high of 105 to its current price around 10 1/2. The stock appears to be at a bargain price, but before you buy into the stock, research the company throughly to decide if the risk is worth the reward. Without a doubt, future news events involving the My.MP3.com service will cause added volatility with the stock price of MP3.com. Anyone buying the stock should remember that this is a high risk, high reward stock. As always, invest like a champ! Please e-mail your comments and questions to stockchamp1@yahoo.com. |
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Copyright © 2000 Chirs Coyle (StockChamp). All rights reserved.