Peer to peer distribution

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Thu Jul 15 23:49:17 CDT 2004

Technology - Internet Report
Labels Blacklist Song-Swap Cos, Block Deals-Sources

Thu Jul 15, 4:42 PM ET

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By Andy Sullivan

WASHINGTON (Reuters) - The recording industry has "blacklisted" Internet 
file-sharing services and is preventing other companies like RealNetworks 
Inc. from doing business with them, according to music and technology 
industry officials.

The record labels' attempts to isolate song swapping "peer to peer" networks 
like Grokster and Morpheus have blocked deals that could have potentially 
brought in millions of dollars in revenues, the sources said, and might 
violate antitrust laws.

"If the last names of the CEOs of most major record labels ended in a vowel 
they'd be calling this behavior racketeering," said former Grokster 
president Wayne Rosso.

Record labels say they are simply refusing to work with companies they 
regard as illegal.

Some 9.5 million Internet users log on to peer-to-peer networks each day to 
copy music and other material from each others' hard drives.

The recording industry says such unfettered copying has cut into CD sales, 
and it has sued both the networks and roughly three thousand of their users 
for copyright infringement.

Even as the two sides are locked in litigation, several peer-to-peer firms 
have tried to open talks with the industry.

So far, recording companies have shown little interest.

"There is a big difference between exploring a new business model in a 
legitimate and open business manner ... and going into business with the 
taxicab driver who just ran the red light and hit me," EMI Group Plc (news - 
web sites) (EMI.L) Executive Vice President John Rose told the Senate 
Commerce Committee last month.

Peer-to-peer firms have also run into a brick wall with other technology 
companies that distribute licensed content.

British download service Wippit Ltd. broke off plans to advertise and sell 
music on Grokster last year after officials determined that Universal Music 
Group would cut them off.

"UMI have expressed concern about our relationship with your company and 
even though we are providing you with a legitimate service they will not 
license music to Wippit if we have any dealings with your company who they 
consider 'pirates'," Wippit CEO Paul Myers wrote Grokster in a May 2003 

"We had some opportunities, and unfortunately those opportunities were taken 
away from us," Myers told Reuters. He declined to elaborate.

"We have the right and the sense not to do business with people who aim to 
profit or otherwise enable the theft of our artists' music," Larry Kenswil, 
president of Universal's eLabs division, said in a statement.

Other label officials said privately that their contracts commonly are 
written to ensure that their material is not sold alongside illegal or 
objectionable content.

Also last year, RealNetworks (Nasdaq:RNWK - news) abandoned negotiations to 
bundle its music-playing software with Morpheus, a deal that could have 
eventually steered Morpheus users to paid content distributed on Real's 
Rhapsody service.

"The labels have blacklisted you guys ... which means I'm probably not going 
to get much latitude to do anything as far as Rhapsody goes," RealNetworks 
general manager Ryc Brownigg said in a phone message to StreamCast Networks 
Inc. last September.

Brownigg did not return a call seeking comment, and a RealNetworks 
spokeswoman declined to comment.

Two other download services have also declined to work with Morpheus because 
of pressure from the labels, StreamCast CEO Michael Weiss (news - web sites) 
said, adding that confidentiality agreements prevented him from saying which 
were involved.

The record labels have a right to forbid partners from working with 
peer-to-peer companies as long as they do so individually and not as a 
group, one antitrust expert said.

"If it's done individually, then I think the question is, 'Is this a 
reasonable condition on the contract,' and the answer is yes," said George 
Mason University professor Ernest Gellhorn.

But the labels are shooting themselves in the foot by ignoring such a large 
audience, said one music-industry executive who declined to be identified.

"If they could get one dollar out of these peer-to-peer users ... that's $10 
million in the kitty toward the artists and writers. That's a step forward, 
and one song sold is one song not illegally downloaded," the executive said.

Sony Music Entertainment Inc. (6758.T), BMG (BERT.UL) and privately held 
Warner Music Group declined to comment.

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