Why is this man smiling? Warner Music board member Shelby Bonnie

A member of the Warner Music Group board of directors is about to become embroiled in a copyright infringement lawsuit against CNET and its owners CBS Interactive that could be extremely embarrassing for the music company and bring unwanted attention to the pending sale of WMG to investor Len Blavatnik.

Plaintiffs in the copyright infringement lawsuit Alki David v. CSB Interactive have pointed out that Shelby W. Bonnie held seats simultaneously on the boards of both CNET and Warner Music for two years. During this time Warner CEO Junior Bronfman was suing Limewire for copyright infringement and very publicly complaining about the huge monetary damage it had inflicted upon his company while at the same time having a sitting board member who was also serving as a director of the biggest distributor of Limewire software, more than 220 million copies in fact.

Bonnie, CEO of Whiskey Media, LLC, is also the founder, former CEO (March 2000 to October 2006) and Chairman of the Board of CNET. Bonnie resigned as CEO in 2006 under a cloud of suspicion involving the backdating of stock options, though he continued to serve as a director of CNET Networks until March 2007. Oddly, just last week the New York Post ran a story detailing how the Warner Music board lowered the vesting price for 1.6 million of Junior’s restricted shares the day before the announcement was made that WMG was up for sale, thus sending the stock price up 27% resulting in an additional $13.6 million for the prodigal Seagram son. Great timing.

During his tenure with CNET, Download.com, a CNET site, was the primary distributor of peer-to-peer software and profited greatly from file sharing’s popularity. On June 27, 2005, while Bonnie was still CEO of CNET, the US Supreme Court issued its decision in the MGM v. Grokster case, which laid out very strict guidelines for the marketing and distribution of p2p software with intent to infringe upon copyrighted material.

In November of 2005, just 4 months after the Grokster decision, Bonnie accepted an invitation to sit on the board of directors of the Warner Music Group, a position he still holds that carries an annual compensation of $160,000 per year, and is considered to be a reliable ally of Junior Bronfman. So for at least 2 years Shelby Bonnie was a director of both CNET and Warner Music Group, one company distributing over 95% of Limewire’s software (and over 98% of Kazaa’s software), enabling the theft of millions of dollars worth of the other company’s copyrights. Warner Music, of course, was a plaintiff in both the Limewire and Grokster cases. WMG CEO Junior Bronfman recently testified in the Limewire trial as to the extent of his company’s damages saying that LimeWire had a “devastating impact” on the industry.

The Blavatnik Boys (left to right) Larry, Moe and Curly

Warner Music was also a plaintiff and financial beneficiary in the thousands of lawsuits filed by the RIAA against private individuals for illegally downloading their music using Limewire (and other) software obtained directly from CNET.

The lawsuit, brought in May by billionaire entrepreneur Alki David, claims that artistic works of his and his co-plaintiffs were infringed upon because CNET distributed Limewire file-sharing software (among others) and was willfully encouraging and profiting from the distribution of p2p software that was used for illegal purposes. Not to mention the distribution of DRM-stripping software, which is a direct violation of the DMCA. The suit is clearly an attempt to widen the Grokster decision.

Alki David has accused CBS of hypocrisy. His theory is that because CBS owns CNET—which was the main distributor of the Limewire file-sharing software—CBS has made a major contribution to online piracy. (Limewire’s software has now been banned and the service was shut down by a court injunction). “The CBS Defendants’ business model has been so dependent upon P2P and file-sharing that entire pages of Download.com are designed to specifically list and categorize these software offerings,” says the complaint. “In fact, the CBS Defendants’ were well aware that these software applications were used overwhelmingly to infringe when they
 first partnered with LimeWire and other P2P providers, but ignored it in exchange for a steady stream of income.”

While David originally floated the idea of a class-action lawsuit against CBS, his current suit has several named plaintiffs but is not seeking class-action status. That is about to change.

Billionaire plaintiff Alki David

According to David, he is about to add thousands more copyrights to his lawsuit, having found many ebook publishers willing to sign on. He is actively seeking more plaintiffs and then attempt to have the suit classified as a class action. To that end, he has set up a web site where copyright owners who feel that their property has been infringed upon can register to join the lawsuit. The site also features a long video staring Alki David himself explaining the ins and outs of the action and offering solid evidence against CNET, including Cnet broadcasts featuring some of their reviewers and editors explaining how to use certain p2p software to download copyrighted recordings and films. David went on to tell me that he hopes to soon have over 10,000 copyrights added to the complaint.

In the meantime Shelby Bonnie finds himself in a somewhat awkward position and may have, in the words of Ricky Ricardo, “a lot of splainin to do”. At the very least it gives the appearance of shadiness, and let’s face it, Junior Bronfman is no stranger to corporate shenanigans, having been convicted by a French court earlier this year for insider trading of Vivendi stock. Bonnie is sort of like the spoiled son who gives a burglar the keys to rob his rich Dad’s mansion and then splits the haul with the thief. If you close your eyes real tight you can almost hear Claude Rains inhabiting Shelby Bonnie’s body saying “I’m shocked, shocked to find that gambling is going on in here.” No wonder Junior keeps getting all of those terrific performance bonuses.

David’s attorneys will surely depose Bonnie during the discovery process and several lawyers I spoke with said they had always wondered why the recording industry never went after Cnet in the aftermath of the Grokster ruling. Many legal experts I spoke with feel that the suit will be a tough sell, but who knows how many lawsuits could be born from this if Alki David prevails in his claims against CNET. As one attorney told me, “This is a great country. Anybody can sue anybody for anything.”

However CNET, which was acquired by CBS for $1.8 billion in cash in March of 2008, continues to distribute file-sharing software like “son of Limewire”, Frostwire, which was created by a small band of former Limewire software engineers.

Sources say that the Warner Music people have been very nervous that someone would publicly connect the dots of the Shelby Bonnie situation and bring them a great deal of agita.

Break out the Rolaids kids.

© 2011, Wayne Rosso. All rights reserved.

There was also an interesting story in the NY Times yesterday about how record companies are becomming more “flexible” in their licensing terms. It’s about time. But my guess it that it is still not enough. Record companies have been stuck in their alternate universe for so long that they still don’t understand that the value of their content isn’t what it used to be. And they have to face the reality that now music is basically free. Anyone can get anything anytime. And suing the masses just doesn’t work. In fact, suing anyone just doesn’t work. So they sue a start up and put them out of business. So what?

When I was with Grokster, one of my mandates was to try to talk sense to the record companies and work with them to convert file sharers into music buyers. I would get one of two answers from every record label: 1) we don’t reward pirates; 2) shut down and then we’ll talk. Naturally both answers were utterly ridiculous. Addressing the later first, the labels were so stupid that they all thought that there was some master switch behind a curtain somewhere that we could flip to completely shut down the network. And they refused to believe it when we swore that was not the case. And even if we were able to shut down the network completely, what good would do to cut off millions of potential customers? They just didn’t understand that once you lose them you’ll never get them back. Just ask Napster.

In the first case, let’s dig into the history of the record industry. To say that they don’t reward pirates is utter fallacy. How do you think that they would combat rogue cd plants in Asia that they could not shut down? They made them authorized distributors! They just couldn’t understand that they could and should employ the same strategy with file sharing companies. Now I will admit, when the file sharing companies were winning in the courts before the Grokster case got to the Supreme Court, some of the p2p guys were getting a bit uppity. But that’s no excuse. The goal was to form an alliance that would work for everyone. The guy who tried to break the logjam was Andy Lack when he became CEO of Sony Music. But that’s another story for another time.

A lot of music people, most visibly Paul McGinnis (U2′s manager) want the ISP’s to protect their content. That’s ridiculous. As is the Warner Music proposal to get ISP’s (or colleges and universities) to pass on a “music surcharge” to its customers, just like a tax on your mobile phone. Also ridiculous. It’s just not the ISP’s job, nor in their best interests to do so. Content owners are responsible for their content, no one else. That’s always been the case. ISP’s are not government agencies and thus are not assigned that responsibility. And the bellicose arrogance that the recording industry has historically displayed have not exactly endeared them to anyone, including their own customers.

Jim Killock, executive director of the The Open Rights Group – a UK based group that works on digital rights and freedoms, told the BBC “We need a compelling ‘all you can eat’ music service to reduce illicit file sharing. But [we need] to remember that extreme enforcement measures would probably be very unfair and make people angry.”

So now we’re here in 2009 and something akin to the Sunni Awakening is being suggested by the NY Times article. But just like the Sunnis, record companies have to avoid overreaching. They have already made the investment climate nearly impossible for start-ups to get viable venture capital, as VC’s have learned not to trust them. The major label deals thus far have made it impossible for a start-up to succeed. What they now have to do is much more than is even suggested in the Times article. They have to truly want new companies to succeed and help them do so instead of looking at them as cash cows for big advance payments and high royalty rates in order to bolster their bottom lines. That was and is harmful short term thinking. What they have to learn is that they are all in it together. A-salaamu ‘alaikum.

© 2009, Wayne Rosso. All rights reserved.