Amazon’s new music service has labels scrambling
Amazon (AMZN) took a big gamble this week, one that could backfire in court.
The company launched Cloud Drive, designed to let you store your music collection online. All you need are a computer and an Internet connection — or an Android-based phone — and you can listen to your music library from anywhere. Amazon is letting customers store about 1,000 songs for free.
Sounds kind of amazing. Investors were impressed, sending Amazon shares up nearly 7% in two days to $179.42. But here’s where Amazon gets into trouble: It didn’t ask permission from record labels before launching the service.
You can bet it took all of 10 seconds for all the major record labels to get on the phone with their lawyers over this one. The music labels think Amazon should have re-licensed the music (read: paid more) for online streaming, and one executive described the company’s move as “somewhat stunning,” according to Reuters.
So now the music industry has two sticks of dynamite it’s trying to manage. The first: No one’s sure that what Amazon did is exactly illegal. The second: Apple (AAPL), Google (GOOG) and others are revving up to do the same thing.
Let’s take the legal issue first. Amazon says it’s simply giving users another way to store music. Nothing wrong with that, right?
“We don’t need a license to store music,” Amazon’s music director told The New York Times. “The functionality is the same as (that of) an external hard drive.” Amazon surely vetted this position with its legal team, and right now, the music labels aren’t sure how to handle it.
“We hope that they’ll reach a new license deal,” a Sony spokeswoman told Reuters, “but we’re keeping all of our legal options open.” For now, Amazon’s service doesn’t work with the iPod and iPhone.
The bigger worry for the labels, of course, is that if they don’t get this straightened out now, Apple and Google will launch their own “in the cloud” services without licenses as well. If that happens, any additional money the record labels hoped to make from cloud services will be gone.
You can bet that a long, slow round of negotiations has already begun. Amazon says it doesn’t need new licenses, and maybe it’s right. But Amazon probably has much more planned for its cloud services — stuff it will need new music licenses for — and it wants to stay on the labels’ good side.
Meanwhile, labels need to hammer out a deal soon, before Apple and Google jump in. Worst-case scenario: This all heads to court, and the music industry asks Amazon to pull the plug on its service until the licenses are worked out.
Best-case scenario: Amazon’s bold, no-prior-approval launch forces the music industry to play along, giving everyone the long-overdue option to easily store music online for free.