MP3.com Rally Ignores Glum Outlook on Universal Suit

Updated from 3:36 p.m. EDT:

Four down, one to go.

Investors applauded Web music provider MP3.com (MPPP Quote) Tuesday, sending its shares up 29% after the San Diego-based company settled a patent-infringement lawsuit with Sony's (SNE Quote) Sony Music Entertainment. Importantly, Sony also joined three big-label rivals in agreeing to license its music catalog to MP3.com for an undisclosed fee.

Ruby Tuesday MP3.com's daylong rally

MP3.com shares surged 2 1/4 to 10 at midday. But investors' renewed enthusiasm looks misplaced: Though MP3.com has now settled with four of the five big record companies that sued it for patent infringement, analysts don't expect the fifth settlement to come easy. And some reckon that the last litigant, Seagram's (VO Quote) Universal Music Group, isn't likely to go for a licensing deal with MP3.com, which could undo all the investor goodwill the online music company has built recently.

Tough Nut

From the beginning, MP3.com "has whispered that Universal will be the toughest nut to crack," says Nitsan Hargil, an analyst at Kaufman Bros. in New York. That is in part a result of the bad blood between the two companies, which grew out of MP3.com Chief Executive Michael Robertson's bashing of the record labels and of Universal Music Group in particular.

Sour Note MP3.com's long slide

Source: BigCharts

MP3.com and Universal are scheduled to go to trial on Monday, and Hargil isn't optimistic that they will settle before then. While the analyst says he can't imagine a judge imposing much harsher terms on MP3.com than the company has agreed to with the four other labels, a more important question is whether Universal will agree to license its extensive catalog to MP3.com. And for MP3.com shareholders, the signals aren't good. (Hargil rates MP3.com a hold; his firm hasn't done any underwriting for the company.)

Without a licensing deal with Universal, MP3.com would be shut off from around a quarter of the world's popular music, a potentially crippling disadvantage, Hargil says. Universal's artist roster includes U2, Sting, Blink 182 and Shania Twain. (Universal didn't immediately return calls seeking comment.)

That paints a fairly bleak picture for MP3.com, considering that Hargil at Kaufman Bros. says a licensing deal between the two companies would be a "shocker."

Robin Richards, MP3.com's president and chief operating officer, said in an interview that he's "very optimistic" with regard to negotiations with Universal, though he declined to comment on the substance of the talks, which he's leading for MP3.com.

Richards says he doesn't know either way whether the company will strike an agreement before the case hits trial next week. "I can't say yes, I can't say no," he says. "All I can say is, I've got my trunks on, and I'm running hard." Richards did say that nailing down a licensing agreement with Universal is a key. "I would think so, yes," he says.

Sticker Shock

MP3.com's stock has dropped sharply since late April, when a federal court judge found that MP3.com's Internet music database service, my.MP3.com, violated copyright law. The judge also ruled that MP3.com illegally copied the songs from 80,000 CDs to store on its servers for users to access through their personalized music lockers.

While terms of the other big music labels' settlements haven't been disclosed, MP3.com has reportedly agreed to pay out between $15 million and $20 million each to Time Warner's (TWX Quote) Warner Music Group, German media giant Bertelsmann's BMG Entertainment and EMI Group of the U.K., which Time Warner agreed to acquire in January.

MP3.com set aside $150 million to cover the costs of its legal fight, according to documents filed with the Securities and Exchange Commission last month.