Breaking the Law To Get a Break
Friday, March 21, 2008
For many music-oriented Web start-ups, a copyright lawsuit can be a death sentence. But for Imeem, getting sued by one of the biggest record labels played a pivotal role in its success.
In May, Warner Music Group sued the social network, saying that it allowed millions of people to share Warner artists' music and video content without permission. It sought up to $150,000 in damages for every unlicensed song or video posted on the Imeem site.
Two months later, Warner executives changed their tune. They scrapped the lawsuit, invested in the company, and struck a deal to make its entire catalog available to Imeem's growing number of members for free -- to stream, not download -- in exchange for a cut of the site's advertising revenue.
Warner now regards the site as a powerful word-of-mouth marketing asset.
"If you can take that, sponsor it with advertising, and have an integrated way to buy, we think we can not only retain those customers but also grow the business," said Michael Nash, Warner Music Group's executive vice president of digital strategy and business development. "The more music people experience, the more they'll want to download and own."
Imeem lets its members upload and swap songs, music videos and photos and is the first start-up to get all four major labels to sign off on an ad-supported model for distributing digital music.
The site got the attention of users -- and music labels -- by first allowing the unauthorized exchange of music on its site. Like Napster and Kazaa before it, Imeem gained popularity by using music to promote its technology -- even before getting the necessary licenses from record labels. The lesson of Imeem, however, points out a dilemma in the entrepreneurial world: Is breaking the law the secret to success in the digital music industry?
For many other start-ups, it's a tough trade-off to become legitimate.
Like Imeem, Sonific, an online service that allows users to stream music to blogs or personal Web pages, is trying to strike licensing deals with large record labels to expand its music library, which now has about 250,000 tracks from smaller, independent labels. But Gerd Leonhard, the site's founder, said it cannot get the interest of labels because of its relatively small pool of 100,000 users.
"Our major hurdle is that we're trying to do it legally," he said. "You're either forced to use the music without the proper permission or you just don't get your audience."
David Pakman, chief executive of eMusic, a competitor to Apple's iTunes, said his decade-old company has licenses only with independent labels because getting the attention of the major studios has been difficult.
"Companies that are most often rewarded with licenses are the ones that got big on illegal actions," he said. "It's hard to advise entrepreneurs to follow the law because it's unlikely they'll get off the ground."