MP3.com's Steep Slide

LAGUNA NIGUEL, Calif. -- This week, Chief Judge Marilyn Patel of the U.S. District Court in San Francisco will finally hear the contentious case of Napster, the ballyhooed software company that helps people trade copyrighted music. The owners of said copyrights, the major record labels, are suing Napster through their trade group, the Recording Industry Association of America. Rapper Dr. Dre and headbangers Metallica have piled on with lawsuits of their own.

But just because Napster is a privately held company (backed by a recent influx of $13 million from the venture capital firm Hummer Winblad Venture Partners) doesn't mean the suit won't have major implications on the stock market. And guess which company is trying to play the controversy to save its own failing stock?

None other than last year's bad boy, MP3.com (MPPP:Nasdaq - news - boards), with its share price trading around 12, 89% off its high set eight months ago.

Not Sweet Music The stock is nearly 90% off its highs

MP3.com's CEO Michael Robertson revealed his pusillanimous strategy on a panel at The Industry Standard's Internet Summit last week. Essentially, he's offering his company up to the music industry as the devil it knows. The battle against downloadable music may be hopeless, but he's hoping the music business will decide that MP3.com can offer an amenable answer. "The challenge is how do you create a better drug," says Robertson. "Because the war on drugs isn't working."

Whipping Boy

MP3.com had been the record industry's whipping boy until Napster came along. After all, MP3.com's "MyMP3" service was offering downloads of everyone from Leadbelly to Led Zeppelin from its massive servers and was financed by a powerful venture capitalist and a stellar July 1999 IPO. It still sits on a war chest of $379.1 million in cash.

"This time last year MP3 was the extreme," says Credit Suisse First Boston analyst Heath Terry (his firm was an underwriter of the MP3.com IPO).

But now Napster, poorly capitalized and, until recently, run by 19-year-old Shawn Fanning, offers a more tantalizing target for the RIAA. "Napster is the dream defendant," says interim-CEO Hank Barry, who prior to joining Napster was a Hummer Winblad partner.

The debate over Napster was the most heated discussion at the conference. On a music industry panel, Barry served well as the whipping boy, while Rob Glaser, RealNetworks' (RNWK:Nasdaq - news - boards) CEO, and Larry Kenswil, Universal Music Group's president, took shots at Napster. (Universal is a division of Seagram (VO:NYSE - news - boards).) Def Jam records founder Russell Simons, who also serves as CEO of 360HipHop.com, and Maverick (a Time Warner (TWX:NYSE - news - boards) division) and recording artist Jude, interestingly, were somewhat ambivalent about Napster. "As businessmen, I kinda assume that any of these guys are kinda ripping me off a little," says Jude. "You get taken from as soon as you sign on the dotted line."

Not Backing Down

But Barry refused to give any ground. "Sharing a file without a license is absolutely within the law, and there are 20 million people doing that right now," said Barry.

That brought guffaws from the audience. With Barry in the next seat, Glaser lashed out at him. "I think that we're going to look back and remember Napster as the Year 2000 equivalent of PointCast," said Glaser, referring to the once much touted company that "pushed" content to PCs but later flopped. "Without a long-term plan to go into the future, they can't survive."

But Robertson seized the opportunity to reposition his company as an unlikely friend of the industry. Much like a politician will use a radical to define himself as centrist, Robertson seemed to suggest that he was shocked, shocked, that Napster would facilitate the free distribution of copyrighted songs. When Barry described liberal copyright law as "a leaky boat," Robertson shot back. "A leaky boat? You capsized the whole thing. All content can't be free; there's got to be a middle ground."

Robertson might have a point. The major labels seem unable, even unwilling, to find a way to serve up tunes digitally. "It's easy to start something up with $13 million and say, 'What's the most I can lose, $13 million?'" said Universal's Kenswil. But a bigger company potentially has much more to lose and could even find that its own digital music operation ends up cannibalizing its main business.

The Lesser Evil

With the labels so hamstrung, MP3.com may well seize the opportunity. But if it doesn't, MP3.com may find itself left with the paltry business of offering downloads of unsigned, small-time bands. Becoming the music industry's answer might be the stock's only hope of soaring again. "That's not the key to the stock," says Terry, the analyst. "There is a business there without MyMp3. But truly revolutionizing the consumer side of this, the music industry has to see MyMp3 as the middle ground."

But an even more intense discussion about the music industry took place late Monday night at the Ritz Carlton library. Sometime after midnight, Courtney Love held court with a handful of friends hunched around a coffee table, including Broadcast.com (now a Yahoo! (YHOO:Nasdaq - news - boards) subsidiary) founder Mark Cuban, Glaser and venture capitalist Bill Gurley of Benchmark Capital. Love, who's passionate about digital music and remarkably erudite about the music business, held little back.

At some point, she was asked what she thought of Napster. Love instantly answered: "Sucks."

And MP3.com?

She took a draw of her cigarette, and pondered it for just a moment.

"Sucks."

---

Cory Johnson files weekly from TheStreet.com's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at [e-mail].

---

For more columns by Cory Johnson, visit his column archive.