Universal Music Group lawsuit against Grooveshark, filed Friday in a US District Court, includes revealing internal emails to bolster its claim that parent company "Escape [Media Group] has brashly acknowledged the unauthorized and infringing nature of its business." It's an old story in digital music: should a startup seek permission to use copyright material or forgiveness for using copyright material without a license?
Judging from internal emails, Grooveshark opted for forgiveness. In a April 27, 2010 email to Sina Simantob, a Escape Media Group director, Andrew B. Lipsher, then a partner at private equity firm Greycroft Partners, explained that he understands "the ask forgiveness and not permission strategy. It is a hard one to swallow as an investor knowing what I know, but the labels have been so horrible and naïve that I think it is the only one that makes sense." The email indicates Lipsher, currently SVP of CorporateDevelopment at Clear Channel Communications, passed on investing in Escape.
>A December 1, 2009 email from Simantob to unknown recipients explains that Grooveshark has achieved "all this growth without paying a dime to any of the labels." One month later, Simantob wrote an email to Universal's David Ring that acknowledged "Grooveshark owes UMG for the use of its valuable content" and planned to settle the case "hopefully sooner than later."
While Grooveshark generates revenue from advertising and subscription fees for a premium service, it appears the service also hopes to mine its consumer data for sale to rights owners. In the December 1, 2009 email, Simantob explained the service would use the labels' songs until it reached 100 million unique users. By the point, he wrote, Grooveshark's data on listener behavior would be so valuable to labels it could charge more for the data than what it pays labels in royalties.
The "shoot first, ask for forgiveness" later approach to building a music service can end badly for a startup. Project Playlist could not leverage its popularity into licensing deals and was driven out of business. Muxtape wasn't able to gain much momentum before legal threats forced it to change its business model. Labels sent a clear message: pursue the "shoot first" strategy at your own peril.
The glowing exception is YouTube, which built its business on copyright infringement but negotiated deals with rights holdersafter it attained widespread popularity and was acquired by Google. But YouTube still faces legal problems regarding how user-uploaded content is uploaded and infringing content is flagged for removal. The company won a decision in June 2010 regarding the DMCA's "safe harbor" provisions. The appeal is currently being heard by the 2nd Circuit Court.