MP3.com is every music listener’s dream and every record label’s nightmare.

The San Diego company offers thousands of songs on its site that can be downloaded to home computers for free. Over the last year, that happened more than 4 million times.

The advertising-driven company does not pay artists any fees, claiming a role similar to a radio station. But MP3’s visitors don’t just listen to the music. They can duplicate it onto CDs.

The end result is a crystal-clear recording they got for free.

As the digital era transfigures the music world, record companies and online music companies are butting heads in their struggle to protect their respective bottom lines.

Record companies want to make sure they and their artists receive royalties for music distributed digitally, while the fledgling online music companies strive to avoid being nickel-and-dimed to death.

The first annual Webnoize conference, held last week in Universal City, provided a glimpse into the divisive issues emerging in the digital music arena. While representatives from both industries said they want to work together, so much frustration and even confusion emerged during a panel on intellectual property rights that harmony is likely to be a long way off.

“Is the (Recording Industry Association of America) embracing or opposing the natural evolution of the Web?” asked Ken Hertz, an attorney with Hansen Jacobson Teller Hoberman in Beverly Hills and the panel moderator.

It all depends on your perspective.

The fledgling online music industry is going through requisite growing pains, and legislation is racing to keep up with evolving technology. The recently passed Digital Millenium Copyright Act, for which industry groups such as the RIAA lobbied, is aimed at protecting copyright holders in the digital era. One provision of the law, which President Clinton signed at the end of October, standardizes royalties that must be paid to record companies and their artists by online companies.

Some in the online community are not taking kindly to that.

“As things stand now, a tax will be levied on our revenues. You want to skim the grease off the top before the business even gets going,” complained Jan Anderson of NetRadio Network, a Minneapolis-based company that runs a free music entertainment site. “We want to help you (the record companies) sell CDs, but we can’t with the grease skimmed off.”

The Internet music industry generated $36.6 million in sales last year, a fraction of the $11.9 billion generated by the traditional music industry, according to Jupiter Communications. However, the online music industry is projected to grow to $1.1 billion in annual sales by 2002.

Cary Sherman, general counsel for the RIAA, which represents the interests of major U.S record companies, says that even a fledgling industry has to play by the rules.

“I’m mystified by the concept that everyone should be able to make money off music except the people who make it,” Sherman said. “You can have access to recordings if you pay a percentage for it. It seems like a fair compromise.”

Moreover, according to Sherman, online companies that refuse to pay the full fees are cheating musicians out of their livelihood. Songwriters earn more than 80 percent of their income from royalties, according to BMI, a non-profit music organization that monitors copyrights and distributes royalties.

The Digital Media Association is taking a conciliatory stance.

“All of us are making money by promoting music,” said Seth Greenstein, outside counsel for the digital media trade group. “Is that compensation enough? The fact is, artists deserve compensation for what they bring to the table.”

Greenstein expressed a conciliatory stance on another incendiary topic that of new playback devices. In October, a Los Angeles court threw out RIAA’s attempt to prevent San Jose-based Diamond Multimedia Systems Inc. from selling its new handheld device. The Walkman-style product, which retails for $200, can download up to 60 minutes of music off the Internet and play it back at CD quality.

Because several Web sites make music available to be downloaded for free, the RIAA argued that Diamond’s product could lead to piracy. RIAA is expected to appeal the court’s decision, but the initial win was a significant coup for the new-media industry.

Sherman said the record industry’s goal is not to kill devices such as Diamond’s, but to promote other devices that would protect copyrights.

“The problem with the players that don’t distinguish between legitimate and illegitimate content is that they encourage piracy,” he said. “People think when they buy a CD that they’re buying a piece of plastic, not music. These players make the problem worse.”

No clear-cut solutions emerged from last week’s conference, nor are any likely to surface in the near future. The music industry now faces the same dilemma the film industry experienced when the VCR debuted and piracy issues first surfaced. It takes time and legislation to iron out the problems.