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June 23, 2005

Count Down to Grokster vs. MGM

Sarah Lacy

It takes guts to be a startup in the music sharing business these days. Sure, you can get a lot of press. But there are also a lot of pitfalls. Trying to come up with something better than iTunes is hard enough without liability fears and the cost of hiring a good copyright attorney. And buying insurance to offset potential liability post-Napster? Forget it.

So you have to give Mercora props for, if nothing else, tackling and finding an innovative way to comply with the Digital Millennium Copyright Act.

The Silicon Valley startup, which is backed by Norwest Ventures, hosted a dinner last night in San Francisco jam-packed with legal experts and even a real, struggling musician to weigh in on what the Supreme Court decision—due any day now—could mean.

The evening never seemed to end, and Mercora waited way too long to feed the antsy group of reporters and analysts. A couple hours in when I hesitated over the bread basket another attendee whispered, “This isn’t about carbs-- this is about survival!”

But the evening was interesting nonetheless. Mercora is obviously pulling for Grokster, but regardless of the decision executives claim to be one of the few startups out there in 100% unambiguous compliance with the law.

Here’s how: Mercora is really Internet radio. Everyone on the Mercora network is his or her own little radio station, automatically broadcasting his or her personal music library. In accordance with the law, Mercora pays royalties every time someone else plays one of those songs. A cost, some competitors say, that is unsustainable. Here’s a new twist since I last talked to Mercora—if you are listening to a “broadcaster” outside the U.S. you can record their music thanks to different copyright laws in different countries.

Mercora charges a subscription for downloading music, getting your music through your mobile phone, and other premium services. It also runs Google-type ads, alongside music searches. Whether these revenues can support the royalty payments will depend on scale and how much money Norwest is willing to invest. Building consumer businesses takes luck, money, and time.

Mercora’s existence underscores an interesting point made last night by Fred Von Lohmann, senior staff attorney with the Electronic Frontier Foundation, a non-profit that does pro-bono legal work for startups caught in the file sharing mess. The pony-tailed Von Lohmann looked more like FBI swat team than attorney, dressed in khakis, a black shirt, black jacket, and black baseball cap with “EFF” emblazoned across the front in bold lettering.

He winded up his presentation talking about what the Grokster case is really about. It’s not about file sharing or peer-to-peer networking. That will go on unabated. There’s too much demand and too many smart startups like Mercora who can find ways to play within the system. If that fails, there are companies overseas to pick up the cause.

This battle is about entertainment wanting to control innovation. It’s an argument that dates all the way back to uproar over the player piano. According to the legal experts last night, the courts have never allowed that—instead opting to require users to pay royalties.

If that were to be overturned, expect all of Silicon Valley to rise up in arms-- not just a few puny startups. Or at least, they should.

05:52 PM


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