At first glance, the music industry appears to be on the verge of a dominant move into digital music distribution. The five major record labels have cleared the last major hurdle to launching their own digital music services, reaching a breakthrough agreement with the licensing agency of the National Music Publisher's Association. Now armed with access to a vast catalogue of popular copyrighted songs, Musicnet-backed by Warner Music Group, BMG, and EMI-is poised for launch on the RealNetworks'web site in late November 2001, while Pressplay-a joint venture of Sony and Vivendi Universal-is slated for debut on Yahoo and Microsoft's MSN before the end of 2001.
In the legal arena, the Recording Industry Association of America's (RIAA) offensives against file-sharing services Napster, Scour, and Aimster have generated momentum for a fresh lawsuit against the most popular Napster alternatives. With its fourth major legal action, the RIAA is directly challenging next generation peer-to-peer networks MusicCity, Kazaa, and Grokster, whose decentralized file-sharing software represents the latest and most advanced avenue available for those engaged in digital music piracy.
Despite these positive developments, the music industry's move into digital music distribution may yet be seriously compromised by legal troubles stemming from its use of intellectual property rights. Responding to congressional and EU concerns about anticompetitive practices relating to digital music distribution, the Antitrust Division of the Department of Justice (DOJ) is investigating Musicnet and Pressplay. The RIAA, the record labels, and the digital music services themselves have been served with civil investigative demands which compel disclosure of documentary information covering the terms of digital music licensing and the establishment of digital market rates. Based on the materials demanded, the DOJ seems intent on amassing a range of evidence that the record labels have gone beyond the degree of coordination that major copyright holders are allowed in order to clamp down on piracy and promote distribution. Specifically, the DOJ is likely to focus intensely on the record labels' refusal to license their substantial holdings of copyrighted songs to online music companies other than the digital services they back.
Growing suspicions about a competition-crushing licensing monopoly may also threaten the success of the record labels' legal battle with Napster, which has continually raised copyright abuse as defense to the infringement claims files against it. Spurred on by Napster's argument that a licensing exclusivity provision in the file-trading service's agreement with Musicnet constitutes misuse of copyright, Judge Marilyn Hall Patel expressed clear reservations about the legality of Musicnet and Pressplay. Although she did not rule on the matter of whether the record label's copyrights were invalid because of a failure to pass antitrust scrutiny, Judge Patel's pointed questions to RIAA lawyers raise the possibility that the music industry's copyrights could be held unenforceable. Such a decision would have enormous negative consequences for the record labels and their digital music initiatives, due to the fact that a copyright abuse finding could allow Napster to escape millions of dollars in damages for two years of willful copyright infringement.
Whether issues of anti-competitive behavior will derail the music industry' move into online music is an open question, and one that bears close watching. While the music industry has operated in the fuzzy crossroads between antitrust law and intellectual property law as a matter of course, it has until recently managed to stay within the bounds of copyright rules. But as the growing DOJ investigation and federal judicial scrutiny indicate, the prospect that the record labels may have stepped over the line into antitrust violations is a real one.
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