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MP3 Slides as Ruling Opens Door to More Suits

Independent labels may see suits against the Web music service as a possible profit center.

The hits just keep on coming for MP3.com (MPPP) .

A federal judge's

ruling Wednesday that the Internet music company will have to pay out $25,000 in damages per CD for its willful infringement of copyright laws finally put an actual price tag on the damages the company may end up paying. Depending on how many CDs are ruled to be covered by the order, the company could pay

Seagram's

(VO) - Get Report

Universal Music Group

between $118 million and $250 million. That number is to be determined in the next phase of the trial, which will take place in November. MP3.com said it will appeal the judge's ruling.

By putting a number on MP3.com copyright violations, though, Judge Jed S. Rakoff's ruling could open the way for the smaller independent labels and publishers to file lawsuits of their own in a bit of legal piling-on that will only further pressure the San Diego-based company's beleaguered stock price.

The Indie 500

Of the 80,000 CDs that MP3.com illegally encoded into its

my.mp3.com

service, some 30,000 are copyrighted by independent labels, says Nitsan Hargil, analyst with

Kaufman Bros.

in New York.

"With a judgment of at least $118 million, you are going to see a lot of people coming out of the woodwork," Hargil warns. (He rates the stock a hold, and his firm hasn't done any underwriting.)

Adds Phil Leigh, analyst with

Raymond James

: "It's like putting a pot of gold on the courthouse steps for the indie labels. A lot of them aren't doing well right now, and their legal departments could become their biggest profit center." Leigh has a buy on MP3.com stock, and Raymond James hasn't done any underwriting for the company.

The

Recording Industry Association of America

, the biggest music company trade group, whose members include many independent labels, and which has been an active player in the case against MP3.com, said it was pleased with the judge's ruling.

"This should send a message that there are consequences when a business recklessly disregards the copyright law," said Cary Sherman, senior executive vice president and general counsel, in a statement.

Publish or Perish

Not to mention ongoing litigation against MP3.com brought by the music publishing industry in March. A lawsuit against the company funded by the

National Music Publishers' Association

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and filed by

Peer Music Productions

and

MPL Communications

is slated to go forward this fall. That suit asks for $150,000 per CD, the same amount the big labels asked for in their initial suit.

MP3.com

settled with the four other big labels after Judge Rakoff ruled in April that the company had infringed on those companies' copyrights. Analysts estimate that the company has agreed to pay out anywhere between $60 million and $80 million to

EMI

,

Time Warner's

(TWX)

Warner Music Group

,

Sony's

(SNE) - Get Report

Sony Music Entertainment

and

Bertelsmann's

BMG Entertainment

.

Hargil says MP3.com stock price will continue to languish in the near term. "You're not going to see it anywhere near the $8 level anytime soon," he says. In early trading Thursday, MP3.com shares were down $1.38 to $6.50, but the stock price hasn't collapsed completely.

That is because, says Raymond James' Leigh, depending on how things break out over the next two months, MP3.com may have seen its low point with Tuesday's ruling. Now that Universal Music Group has gotten a ruling, and MP3.com has had its knuckles sufficiently rapped by the court, the company may seek a settlement to avoid playing the heavy any further.

That said, the outcome remains uncertain. "You're either looking at a disaster, or you're looking a situation that is pretty darn good," Leigh says. "In the meantime, the stock is sort of in between. I think it is right where it should be."