Universal appears to be the only major record label that has figured out how to make money from online music distribution.

The secret: Let someone else do it and then sue the bejesus out of them.

Universal could collect as much as $250 million from the lawsuit it filed against MP3.com, a Web site that distributes music as compressed digital files known as MP3s. A federal judge ruled earlier this month that the site violated Universal's copyrights by letting people download songs by the label's artists without its permission.

Other major labels filed similar lawsuits against the site, but they settled out of court for an estimated $20 million apiece a price that now looks like a bargain bin special. By handing over its Net business strategy to a team of lawyers, Universal has turned a minimum investment into a dot-com-style windfall.

Still, this business model doesn't have much in the way of legs. While record labels can count on winning virtually any copyright case they file against online music sites, most of the defendants don't earn enough money to make a lawsuit worthwhile.

MP3.com is living off the $344 million it generated in its July 1999 IPO, but its stock has since dropped to less than a fifth of its offering price. If appeals courts uphold the award granted to Universal, the site may go out of business.

Scour, a song- and movie-swapping service, recently announced it would lay off the bulk of its staff after it was targeted by an entertainment industry lawsuit. And Napster, the embattled site that helps more than 20 million registered users swap MP3s, would have trouble paying off its own copyright case.

These sites have grown popular by providing Net users with the thing they love most: free stuff. But like many struggling dot-com companies, they still haven't figured out a way to turn goodwill into a good business.

Race for money

Record labels, meanwhile, possess what the song-swapping services lack: the legal authority to make money off the songs and artists people want to hear. But despite this seeming advantage, they're trailing these fundamentally flawed businesses in the race to make money online.

The path to profits seems simple enough. Since people are so interested in digital music, labels should try selling it to them. But the industry is paralyzed by fear that pirates will swap flawless digital copies of anything they might sell online.

Well, here's a news flash: It's happening already, and there's nothing anyone can do to stop it. For every Napster the industry manages to cut off, a half dozen new services will grow in Hydra-like fashion to replace it. Anyone who wants to search for bootleg copies of popular songs will find them period.

Meanwhile, the industry's legal battles are creating ill will among the very people it should be courting as customers. While these lawsuits will produce the occasional MP3.com-style payoff, they also give millions of people a reason to feel good about ripping off record companies.

So what should the labels do? First, they ought to abandon their quixotic pursuit of a secure digital music format.

The industry has held off selling songs online until someone can produce a format that prevents bootleg copies. But the eventual need to turn digital bits into analog signals guarantees no system will ever be foolproof. Six months after any such format is released, it will be rendered moot by a program distributed for free online.

Customized CDs

Since the industry will always be competing with free versions of its own songs, it needs to give people a reason to pay. They can do this by making legitimate songs easier to find and faster to download. Since file-swapping services rely on relatively slow personal Net connections, people would pay for convenience.

People also will pay for service. Labels could allow customers to create custom mixes of their favorite artists and make the finished product available for download. They also could beam a higher-fidelity version by satellite to a CD burner at a local record store, since MP3s offer noticeably lower quality than CDs.

Moreover, they could offer custom, subscription-based streaming audio stations that feature unreleased songs and exclusive interviews with the label's performers. And buyers could earn bonus points, verified by encrypted digital signatures, to be used toward purchases at local record stores.

None of this would create any more piracy than already exists. Indeed, by giving Net users reasons to play it straight, the industry could discourage piracy by going digital the right way.

To contact syndicated columnist Joe Salkowski, you can e-mail him at joes@azstarnet.com or write to him c/o Tribune Media Services Inc., 435 N. Michigan Ave., Suite 1400, Chicago, IL, 60611.

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