MP3.com Stock Crashes on Judge's Music Copyright Ruling

Updated from 2:31 p.m. EDT

Shares in Web music company MP3.com (MPPP Quote) fell almost 40% Friday after a federal judge ruled that the firm is infringing record company copyrights by distributing music for free over the Internet.

The ruling came as a result of a lawsuit brought by the Recording Industry Association of America -- which represents the biggest record Labels -- including Time Warner's (TWX Quote) Warner Bros. Records and Sony's (SNE Quote) Sony Music Entertainment, for making copyrighted music recordings available over the Web at no charge.

"Plaintiff's motion for partial summary judgment, holding defendant liable for copyright infringement, is hereby granted," U.S. District Judge Jed Rakoff wrote in a three-sentence ruling.

Investors took the ruling to heart, sending MP3.com down 38%, or 4 7/16, to 7 3/16 in afternoon trading. (MP3.com closed down 4 5/8, or 40%, at 7.)

The ruling is focused on the company's my.mp3.com service, which lets its 400,000 registered users download from a library of 80,000 copyrighted CD's via the Internet.

MP3.com claims that because it requires users to buy actual CD's through one of several affiliated Internet retailers before they can access the music through MP3.com, it did not infringe on copyrights.

"Many see this ruling as a victory for the record labels, but we see it as a loss for them," said MP3.com chairman and CEO Michael Robertson.

In a conference call, executives from MP3.com expressed concern with the stock's rapid fall, but said that it is too early to know just how the ruling will affect the company.

They also clearly expressed their opposition to the ruling and said they would appeal.

Calling his company a "champion of artists' rights," Robertson added that the judge's ruling will hinder "responsible modes of music delivery such as ours, which requires users to first purchase the CD containing the music they are downloading, compared with other systems such as Napster, which do not protect copyrights."

Robertson said that the company will continue to run the my.mp3.com service, even if the court, as expected, orders an injunction for the company to remove any copyrighted material belonging to the plaintiffs in the case.

He said the company expects little immediate impact on its revenue because 80% of it comes from advertisements, but he did not rule out the possibility that a removal of a large portion of the site's content would alter its long-term business plan.

Some analysts said the ruling had the potential to either put MP3.com out of business or seriously alter its business plan.

"To call this a major blow for the company would be an understatement," said George Nichols, an analyst at Morningstar. "The company had mentioned the my.mp3.com service repeatedly during a recent earnings conference call as one of its greatest assets, but as today shows, such a service is viable only if you have access to popular content." Morningstar does not rate individual stocks, but Nichols had strongly advised selling MP3.com stock as early as July 1999.

MP3.com said that it could take two to three weeks before it gets a written ruling from Judge Rakoff, but executives said they plan to file an appeal as soon as they receive the ruling. Representatives of the RIAA were not available for comment.

Rakoff will now hold hearings to determine whether MP3.com must pay damages and possibly end its practice of free distribution of copyrighted material over the Web.

The RIAA suit seeks $150,000 for each instance of copyright infringement -- a definition that is still muddy in this particular case. If the definition is extended to each song title that MP3.com distributed, the damages could run into billions of dollars.

The ruling is part of what has become a heated debate between record companies and Internet startups on the future of electronic music distribution. A similar case is pending against San Mateo, Calif.-based Napster by the RIAA and several indiviual artists such as Metallica and Dr. Dre.