Music-Sharing Service at M.I.T. Is Shut Down:
"It was hailed as ingenious: a way to listen to music on demand while avoiding the legal battleground of file sharing. Best of all, the music was fully licensed, so there would be no legal trouble."

But it was not, and there is. On Friday, the Massachusetts Institute of Technology announced that it would temporarily shut down its groundbreaking Library Access to Music System until the licensing rights can be worked out.

The music service had its official start one week ago but within hours, music companies, including the Universal Music Group, complained that they had not granted - or been paid for - the required legal permission to make the copies of their songs used by the system.

The creators of the new service, M.I.T. students Keith Winstein and Josh Mandel, were dumbfounded by the industry move, since they had paid Loudeye, a company in Seattle, to fill a hard drive with licensed songs. Mr. Winstein and Mr. Mandel said that they thought the contract with the company guaranteed that the copyright issues had been resolved.

"So far as I know, we bought this music fair and square," Mr. Winstein said.

He called the decision to suspend the service crushing, but he hoped it would only be temporary.

"The prudent thing to do, the good faith thing to do, is to take it down while we feel out where we stand," he said.

The music library idea is a clever blend of technology and law. Its creators built the system within the school's cable TV network; the analog TV network would, the students thought, help sidestep the expensive and restrictive laws and regulations that have grown up around the copying and sharing digital copies of music.

It was supposed to resemble the analog world of radio, in which stations pay performance fees to artists representatives like the American Society of Composers, Authors and Publishers but do not pay royalties to the music labels. Because students could listen to the music without making or trading copies, the system's creator thought that they only had to make sure they had legally purchased the music and would not require further payments to the labels.…

http://www.nytimes.com/2003/11/03/technology/03mitt.html