Vivendi Universal buying MP3.com for $372 million

In a stunning move for the digital music community, media conglomerate Vivendi Universal SA announced Sunday that it has agreed to pay $372 million for MP3.com Inc., the pioneering music Web site that Vivendi's own music unit had previously sued for copyright infringement.

The deal would give the Paris-based conglomerate one of the Web's best-known music destinations and boost its online reach to more than 40 million users, the largest online audience of any of the major music groups. Additionally, it would give Vivendi access to patented technology for distributing music online, which it says could help power Duet, the music-subscription venture it's developing with Sony Corp.

Such a relationship would certainly boost Duet's prospects. MusicNet, a competing subscription platform owned by the other three major labels -- BMG Entertainment, Warner Brothers Music Group Inc. and EMI Group PLC -- along with streaming technology giant RealNetworks Inc. in Seattle, gave its first public preview of the service at a congressional hearing last week.

On the other hand, Duet, which Vivendi says will make its debut by summer, has yet to show it has the necessary technology in place.

"The MP3.com strategic acquisition is a big step forward for Vivendi Universal's priority to develop and implement an aggressive, legitimate and attractive offering of our content to consumers," Vivendi Universal Chairman and CEO Jean-Marie Messier said. The release cited MP3.com's technology, including patented technology for music distribution and comprehensive data management and tracking systems, as a driving reason for the acquisition.

Vivendi's $372 million offer, or $5 a share, represents a 66% premium over MP3.com's Friday close of $3.01. At its height, MP3.com stock traded for $105 a share. The cash-and-stock deal is being structured as a "reorganization that will be tax-free to MP3.com shareholders to the extent they receive Vivendi Universal shares," according to a company statement.

Vivendi's decision to snap up MP3.com is the latest sign that the major recording labels will do everything in their power to wrest control over the direction of online music away from renegade upstarts. With its launch in 1997, MP3.com promised to revolutionize the music industry by giving unsigned artists the tools to distribute their music over the Web and giving consumers more choice in where and how to listen to music. For example, the company's innovative My.MP3.com service enabled users to hear digital streams of CDs they own from any Internet-connected PC. The service raised the hackles of the record labels because they felt it would threaten CD sales. Now that very service will be controlled by the world's biggest label.

The My.MP3.com service was the center of a copyright infringement lawsuit launched by five largest recording groups against the San Diego-based company. Four of the five quickly settled for undisclosed amounts with MP3.com, but Universal Music Group held out. The contentious legal battle ended when MP3.com agreed to pay the recording label, which is owned by Vivendi Universal, $53.4 million in damages for copyright infringement. The deal that ended the lawsuit also gave Universal, the world's largest music group, warrants to purchase equity in MP3.com, though that apparently wasn't enough for the company.

Perhaps even more significantly, since MP3.com already has a licensing agreement with The Harry Fox Agency Inc., the agency that represents a vast majority of music publishers, the deal could put Duet ahead in obtaining publishing licenses. Securing rights from publishers, who own a separate copyright for the songs underlying any piece of recorded music, is essential to any legitimate music-subscription offering.

In fact, a group of music publishers sued Universal late last year, charging that the label hadn't obtained the proper licenses before launching a beta test of an on-demand streaming service through its Farmclub.com Web site. And last month, MP3.com was forced to pull about 1,700 Sony albums from its library because of murky publishing-rights issues.

"With MP3.com's proven technologies and team, we'll have the tools and talents to aid the success of this and other digital-content distribution ventures," said Messier. "Their engineering and digital expertise will be a tremendous advantage for Vivendi Universal, especially in the digital distribution of all Vivendi Universal content and the creation of common technology platforms."

Vivendi also owns the New York-based content site GetMusic LLC and is in the process of acquiring the Redwood City, Calif.-based digital-download retailer EMusic.com Inc., which also operates RollingStone.com and Downbeat.com.

Vivendi Universal didn't comment on outstanding lawsuits against MP3.com, but one company source said it "has done extensive due diligence on the question of litigation. While risks associated with this or any litigation should not be minimized, we believe that adequate measures have been taken to protect the interests of Vivendi Universal." A number of lawsuits are still pending against MP3.com, mostly from independent music labels and artists, including Nashville-based Major Bob Music Company Inc. Tom Waits, Randy Newman and members of the band Heart also sued MP3.com for $40 million early this month.

It's unclear exactly when the deal is expected to receive shareholder approval. Vivendi said MP3.com's board of directors has already approved the deal, and that MP3.com shareholders whose total holdings in MP3.com are more than 50% have already agreed to sign off on the transaction.

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