Wireless operators increasingly are cutting ringtone aggregators out of the loop, opting instead to make deals directly with recording labels. But as EMI Entertainment World Inc.’s lawsuit against InfoSpace Inc. shows, the ringtone business may not be as simple as it seems.
EMI earlier this month filed a $100 million lawsuit against the Bellevue, Wash.-based firm, accusing InfoSpace and its subsidiaries, Moviso and Premium Wireless Services, of breaching two ringtone licensing agreements by fraudulently reporting the amount of royalties owed and infringing on EMI’s copyrights. EMI also charged InfoSpace with obstructing its efforts to audit InfoSpace’s books.
“InfoSpace blatantly and willfully infringed upon numerous valuable copyrights by making available for downloading various well-known compositions owned by EMI Publishing that were expressly restricted from the licenses” including John Lennon’s “Imagine,” according to the suit. “While InfoSpace and its predecessors were earning millions in revenues from consumer downloading of the EMI ringtones, InfoSpace and/or its predecessors were failing to keep accurate records of the downloading occurring through their services and failed to account properly” for owed royalties, EMI charged.
The suit took industry insiders by surprise: InfoSpace has earned a reputation as a conservative-if sometimes misguided-firm, and is a well-established provider of ringtones to major carriers. In a document filed with the Securities Exchange Commission, the company said it is looking into the accusations and vowed to fight EMI’s accusations.
“Based on its knowledge to date, the company believes that EMI’s claims are without merit and that it has meritorious defenses to them and intends to vigorously defend the suit,” according to the filing.
The trouble with the U.S.
Of course, licensing challenges are nothing new to the U.S. ringtone industry. While ringtone providers in some other markets have the luxury of dealing with a single licensing body, U.S. firms must acquire rights with each individual publisher. The process can become even more complicated when multiple songwriters and performers collaborate on a tune.
And record labels often exacerbate the problem by failing to offer licensing information in a business where timing is crucial, according to Shawn Conahan, who served as president of ringtone provider Moviso before it was bought by InfoSpace and re-launched as a direct-to-consumer play.
“The labels are supposed to provide licensing information to the publishers on or around the street date of a music release,” Conahan, who is founder and CEO of mobile blogging developer Intercasting Corp., wrote via e-mail. “In practice, they get around to it up to six months later. It’s not that anything untoward is going on, and it isn’t a nefarious plot, it’s just an accepted industry practice that has some unfortunate implications.”
And that lag time can mean immeasurable lost revenues. A hit 2004 single from hip-hop star Usher, for instance, took weeks to go mobile, reportedly due to an intractable publishing company representing one of the tune’s seven songwriters. By the time the label acquiesced, the song had fallen off the charts, and hundreds of thousands of dollars in potential revenues were lost.
EMI’s lawsuit is certainly a setback for InfoSpace, prolonging a difficult stretch for the company. The online and mobile developer last year lost a major carrier customer when Cingular Wireless L.L.C. said it would deal directly with music labels for its ringtones, and in November said it would halt investment in its direct-to-consumer business, including the recently launched Moviso storefront, opting instead to focus on its online and mobile search services.
But the legal hurdle may also underscore the importance of ringtone aggregators, a winnowing species who are increasingly feeling squeezed by onerous revenue-share deals or cut out of the value chain entirely. Network operators may reduce costs by dealing directly with record labels, but they may find the headaches surrounding licensing and digital rights management too burdensome to take on themselves, Conahan said.
“Those carriers wanting direct deals with labels and publishers should take note of how very difficult it is to deal with an industry that has in place what even our friends in the music space admit is a broken process,” Conahan wrote. “In fact, I think this lawsuit increases the value of InfoSpace to the carriers because InfoSpace a) has domain expertise that is difficult to develop and b) absorbs the risk of the fallout of an evolving licensing process.”
