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Record labels' new best friend: MP3

Michael Robertson can barely contain his excitement. A crowd of about 300 has just watched him show off a gleaming cellphone that plays music through a home stereo. "Look at that," he crows. "Isn't that cool?" But something's wrong. The audience isn't on the edge of their seats. In fact, they seem kind of bored. "I hear you getting restless," Robertson later tells them. "Don't think I don't hear that."

Robertson, the 33-year-old CEO of MP3.com, isn't accustomed to such treatment. While most entrepreneurs labor in obscurity, desperate for the slightest crumb of attention, Robertson has attained near-rock-star status. Investors lavished money on him to the tune of $400 million, and even though he has given some 500 speeches in two years, the media couldn't stop writing about him.

The source of his fame has been his David vs. Goliath fight with the music industry that began almost as soon as he started the company in 1997. He was promoting MP3, a format for Internet music listening that made copying a snap. That angered the record companies, which were gearing up to push their own proprietary formats. Robertson was promoting a standard they couldn't control and one that could hurt their profits.

Legal blues. The hatred came to a head in January when the record industry sued MP3 for copyright infringement. MP3.com's main product lets users listen to tunes located in a music locker on the company's servers. Listeners just had to log on and stick a CD in their PC to prove they owned the music. But the recording industry said the locker had been assembled illegally. On April 28, a federal judge agreed, and Robertson temporarily shut the service down.

All that's changing now. Spurred by the spread of programs like Napster, Gnutella, and Freenet that allow fans to download free music over the Internet, Robertson and the recording industry are becoming business partners. He has already settled with BMG Entertainment and Warner Music. Deals with Universal, Sony, and EMI are expected.

The deals will cost Robertson in a number of ways. Monetarily, it'll set back MP3 some $100 million in damages. And the peace treaty runs the risk of turning off some of MP3.com's roughly 15 million customers. To his legions of fans, tracking the success of Robertson's business plan is a lot less fun than watching him thumb his nose at the music industry.

But the deals were essential. Robertson says his ultimate goal is to become the cable TV network of the music business, and with licenses from the top five record companies, he's now got the content to begin to make that happen. Besides, MP3.com had no choice but to negotiate. The company still has no profits. The new plan is straightforward: to enable consumers to listen to their music anywhere, to listen to CDs they purchase online immediately, and to enjoy music they don't own by paying a monthly subscription. He will also market the service to businesses, in hopes of supplanting the ever present elevator and telephone music. Eventually, he hopes to charge bands for access to his database of customers' musical tastes.

MP3.com still has the potential to be revolutionary. "The music business today is all about CD sales--a packaged good," Robertson says. "We think of music as a service, with different price points." With such a business model, he believes he can exponentially increase the size of the $40 billion industry the same way videocassette sales and rentals and premium and pay-per-view cable channels created new opportunities for the movie business.

He's got a long way to go, though. To begin with, he needs a more encompassing license agreement with the major labels. The current deals will allow consumers to listen to music they already own over the Internet but not to buy new music from the major labels. "He's not likely to make enough in advertising to cover his licensing fees, and I doubt consumers will pay a fee for the convenience of listening to music they already own," says Ric Dube, an Internet music analyst at Webnoize. Indeed, many believe that the only way he can succeed long term is to pretty himself up for a sale to a company like Yahoo!--a possibility Robertson does not dismiss. Who can blame him: If Yahoo! bought his company for, say, $40 a share, he'd be the next Internet billionaire.