Music group takes stake in MP3, which pays $53 mil

NEW YORK — In a surprise consent judgment Tuesday, MP3.com agreed to pay Universal Music Group compensatory damages of $53.4 million for copyright infringement — far less than the $118 million to $250 million range that was laid out in court proceedings last fall.

Falling in step with the other major music labels, Universal has also agreed to license its entire music catalog for use on MP3′s My.MP3.com digital music locker service — the very utility that got MP3 into legal trouble in the first place. Terms of the licensing deal weren’t disclosed, but they are said to be similar to those hammered out with the other labels.

As if that weren’t enough reconciliation for one day, Universal also plans to purchase a “significant amount” of warrants to take an equity stake in the online music company, said MP3 chief exec Michael Robertson outside the courtroom.

Sources close to the deal said the warrants were purchased for $250,000 and will entitle Universal to buy nearly 5% of MP3.com at an undisclosed price. Robertson said the purchase price would be above MP3′s current trading price.

Stock moves up

News of the judgment renewed investors’ confidence in MP3′s Nasdaq-listed shares, which have slid dramatically from their 52-week high of $53.25 in November. The stock ended the day up 62ยข at $4 after trading as high as $5 during the day.

“Now we’re in a position where we have all the record labels on board and we can turn our attention to developing a great consumer experience,” Robertson said.

The judgment, blessed by Judge Jed S. Rakoff in a 10-minute proceeding in Gotham Federal Court, effectively ends the long string of legal fights that threatened to put MP3 out of business entirely. The other four majors, Warner Music, EMI Group, BMG Entertainment and Sony Music, all settled over the summer for a reported $20 million each. None of them, however, made any mention of purchasing a piece of MP3′s equity.

And last month, the National Music Publishers’ Assn. struck a three-year deal with MP3 by which the Netco will pay the NMPA’s Harry Fox Agency up to $30 million to cover publishing royalties for songs on My.MP3.

Rumors had circulated over the past few weeks that Universal and MP3 were hammering out their own out-of-court settlement. However, sources close to the situation said any such deal could expose MP3 to higher payments to the other four majors, who would use its terms as leverage to renegotiate their own settlements.

The money to be paid out to labels and publishers could reach as high as $163.4 million. But that’s still several million shy of the $170 million that Robertson said MP3 has set aside at the end of its second quarter for suit-related payments.

MP3, at quarter’s end June 30, had more than $300 million in cash and equivalents on its books — more than enough to pay the piper and still fund operations for the foreseeable future.

Back on track

Financially speaking, that means MP3 is now free to get back to its stated goal of making money selling music-related services on the Internet, said Robertson Stephens analyst Sasha Zorovic. He predicted MP3 will attain that goal by the fourth quarter of next year, but noted that his estimate could change depending on the details of the Universal pact.

The deal also brings to a close the most hotly contested dispute over intellectual property on the Web since the big five major music labels’ ongoing suit against Napster. That case took a dramatic twist two weeks ago when media giant Bertelsmann teamed up with the file-sharing renegade to develop a legitimate membership service.

The significant moves toward the resolution of both disputes also mean the music industry can now speed up the pace of its own sporadic efforts to make music available online, Zorovic contended.

“The labels were reticent to post some of their best content on the Internet because they wanted to make sure that their rights would be protected,” he said. “Now, they are more confident that they can make that happen.”

In another surprising move, Universal plans to give $25 million of the damage award directly to musicians on its labels in the form of credits to the accounts of artists whose work has been infringed. Artists will be compensated based on the number of songs that appeared on My.MP3, rather than the number of times they were played, which is much more difficult to ascertain.

“We’ve been saying all along that we’re doing this on behalf of copyright holders and the artists,” Universal prexy and operating chief Zach Horowitz told Daily Variety.

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