AllofMP3: "the world's largest server-based pirate Web site" or the business model of the future?

CNN is reporting that a Russian Web site named AllofMP3.com lets visitors download for personal use entire albums for less than $1.00! U.S. trade and music industry officials are calling the site "a direct obstacle" to Russia's negotiations to join the World Trade Organization. Neena Moorjani, chief spokeswoman for the Office of the United States Trade Representative, is quoted in the CNN report as characterizing AllofMP3.com as "the world's largest server-based pirate Web site."  At issue, well, the press points to the failure to pay licensing fees to copyright holders. However, CNN really doesn't do justice to the issues arising from how AllofMP3.com conducts its business.

AllofMP3.com is not violating Russia's copyright laws. It pays licensing fees to the Russian Multimedia and Internet Society (ROMS) as required by law. ROMS, a collecting society, is permitted by Russian law to act on behalf of rights holders who have not authorized them to do so. But according to the International Confederation of Societies of Authors and Composers, ROMS does not pass collected royalties to foreign artists or music companies. Sounds bad.

Or maybe just misleading. Rights holders have to sign an agreement with ROMS to be able to collect their royalties but most haven't. Hence, no royalty payments to rights holders. MuSeekster.com believes that "rights holders refuse to sign a ROMS' agreement or are advised by their lawyers to refrain from addressing ROMS because this could be deemed as an acknowledgment of ROMS' position as a collection society."

The Confederation expelled ROMS for complying with Russian law -- for issuing licenses to sell foreign music without getting agreements from the right holders -- in 2004, about the same time that AllofMP3.com was "discovered" by mainstream Western media. So is AllofMP3.com a pirate? Not really. AllofMP3.com is a bit of a scoundrel; the company is simply taking advantage of a loophole created by Russian copyright law.

The Sydney Morning Herald's Charles Wright is credited with "discovering" AllofMP3.com. He reported downloading 968 tracks in MP3 format for $48.65 US. The same downloads from Apple's iTunes would have cost, according to Wright, $958 US. Source: Russian site is music to the ears (April 27, 2004)

Media Reaction to AllofMP3's Music Service in the West
When Western media "discovered" AllofMP3.com, the leading German computer magazine, c't, awarded it the best music service in 2004 and the official Consumers' Organization in The Netherlands selected AllofMP3.com the best place to download music. More recently, an April 7, 2006 review of download music services by the "must read" TechCrunch blog had this to say:

The choice for best overall service is dead simple. The best service by far is AllofMP3.com. ... It is so cheap and easy to use that many people choose to download music from AllofMP3 in lieu of ripping their own CD collection.

TechCrunch tempered its remarks with the following:

The problem is that AllofMP3 operates under a different set of rules (Russian copyright law) than the rest of the companies (reviewed). ... Some people have ethical concerns with using the service since no money makes its way back to the artists or labels.

How AllofMP3.com Conducts Business
Let's look at the situation a bit more closely. There may be some under $1 albums for sale, as claimed by CNN, but I didn't find any. MuSeekster's price comparison chart of online music sellers lists AllofMP3's prices at 12 cents per song (at 2 cents per MB) and $1.80 per album (at 2 cents per MB). Based on my very unscientific sample of the site's catalog, I think MuSeekster's prices are more accurate than what CNN is reporting. Still damn cheap but a tad less "UNDER $1" shocking. This assumes, however, that we understand that AllofMP3.com has a number of different pricing options.

Variable Pricing Model
The key to AllofMP3's pricing is that the price of the files you download is determined by the audio quality you select, by the file format and bitrate used. The consumer chooses the audio codecs using the service's online encoding and there are many to select from: MP3, WMA, OGG, MPC, MPEG-4 AAC, etc. Consumers also have the option to download a track in the original uncompressed .wav format. Essentially this means that the AllofMP3.com customer is buying music by the megabyte in DRM-stripped files.

It's the Business Model, Stupid!
So is non-payment of royalties to artists really the "big" issue here? I don't think so. AllofMP3.com's business model is disruptive. The major industry players want to make AllofMP3.com disappear because the company's growing popularity is putting pressure on the industry to strip out DRM, give consumers audio quality options, and keep music download prices low.

As for AllofMP3's "legitimacy," let's just say that sometimes some good can come out of greed. [JH]