MP3.com Plays On, for Now - Company Business and Marketing

Even before losing its latest court battle last week, the online music service was working on transforming its business.

CHRISTOPHER MCGUIRE, DRUMMER of Minneapolis-based duo Kid Dakota, hasn't followed MP3.com's trial in New York too closely. In fact, he hadn't even heard of the San Diego-based Web site six weeks ago, when his partner posted the band's laconic melodies on it.

Now McGuire is a little more interested. On Wednesday, U.S. District Court Judge Jed Rakoff ruled that MP3.com's management willfully infringed on copyrights owned by Universal Music Group labels and slapped damages of $25,000 per disc on MP3.com. Total penalties could run as high as $250 million, enough to potentially sink the site. MP3.com plans to appeal.

In April Rakoff sided with the Recording Industry Association of America by ruling MP3.com infringed on copyrights when it built its My.MP3 service, a library of 80,000 CDs stored on its servers. While four of the Big Five record labels -- BMG Entertainment, EMI Music, Sony Music and Warner Music -- quickly settled with MP3.com for a reported $20 million each, Universal headed to court. (The Web site has taken the library offline but expects to relaunch a version that excludes Universal titles in the next few weeks.)

MP3.com's high-profile legal woes have consumed its time and energy even as it embarked on a quiet restructuring of its business. The company, which once thumbed its nose at the major labels, now finds itself trying to preserve its original audience -- people seeking music from undiscovered bands -- while simultaneously serving the very corporations that tried to do it in.

MP3.com wants to augment its advertising revenue by licensing its proprietary storage, delivery and transaction technologies -- capabilities coveted by the major labels. It's redubbed itself an MSP, or music service provider.

Among the services: localized radio programs and online muzak. These hardly rival the glitz of the rock 'n' roll business, but CEO Michael Robertson is convinced their flexibility will attract new customers. "A store owner," he says, "can literally go to the site and change the program that's playing there in the store."

The company is also trying to build a marketing business from the data it collects about users. MP3.com can offer information on where bands are most popular to record executives who plan promotion and tours.

Two weeks ago, MP3.com rolled out its first "joint initiative" with a major label, Elektra Entertainment, direct-marketing the band Vast. The project, referred to as "single serving," helps the label focus its e-mail campaign on markets in which the band's music is already getting airplay. In addition to links to the band's Web site and promotional pitches, the campaign contains an MP3-formatted version of one of the band's songs.

The company still has to survive the next phase of the trial, scheduled to start in November, which will determine how many of the 80,000 CDs stored on MP3.com servers were owned by Universal. MP3.com says about 4,700; the recording giant says more like 10,000.

Even if the court comes to a figure closer to MP3.com's, the resulting penalty would be about $118 million. And since it's settled with four of the Big Five, the 30-month-old company could quickly see most of its cash sucked away.

That could leave McGuire's Kid Dakota grounded. The duo has mixed and mastered a CD and plays as many local gigs as it can. But how to grow the fan base? "If they can't hear it," McGuire asks, "how are they going to form an opinion about it?"

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