August 01, 2012 3:23pm PT by Eriq Gardner
Sony, Warner Bros. Settle $50 Million Claims in Bankruptcy of Murdoch-Backed Startup
The bankruptcy process doesn't get much more exciting than what's been happening with Beyond Oblivion, the ambitious digital music business that was backed by Rupert Murdoch's News Corp. and other investors to the tune of $87 million but went kaput before ever launching.
Since filing for bankruptcy in January, Beyond Oblivion triggered a small bidding war, landed in the hands of the company's former CEO, drew objections from some of its licensors, and most recently on Monday, Sony Music and Warner Music agreed to sacrifice nearly $100 million in potential claims in a settlement, moving Beyond Oblivion a step closer to being beyond bankruptcy.
When Beyond Oblivion was raising tens of millions of dollars and making all sorts of deals, the music industry eagerly anticipated a would-be competitor to services like iTunes and Spotify.
The idea behind the company was to be an online music service with no subscription fees and no advertising that would be cloud-based and pay royalties to record labels every time a song was played. Sound too good to be true? The company aimed to charge consumers a flat fee for including the service on a mobile phone or computer, and there was the rub: Hardware manufacturers were reluctant to adopt the model.
So after blaming the failure to launch on the difficulty of "coordinating the diversity of the ecosystem," Beyond Oblivion entered bankruptcy on January 24.
The company faded from view, a footnote in the struggles of News Corp. to formulate a digital strategy, but then things got interesting.
In March, the New York bankruptcy court approved a bidding process for an auction of the company's assets. Two potential buyers emerged. One was Nassau Music. The other was a company called Gee Beyond Holdings (GBH), which was the front for former Beyond Oblivion CEO Adam Kidron and former CFO James Heindlmeyer.
After several rounds of bidding, GBH emerged the winner with a $4.2 million bid.
But not so fast. The ambitious company had made all sorts of deals prior to going bankrupt and had to contend with the legacy of those agreements.
The first objectors to the asset sale were three companies that licensed digital rights management software to Beyond Oblivion. These firms challenged whether their existing contracts with Beyond Oblivion could be assigned to the never-launched company. Eventually, a deal was worked out and the judge blessed the sale.
Then came time for the claims from creditors.
Unlike the DRM companies, Warner Music and Sony Music took the opposite position that their deals with Beyond Oblivion were operative and entitled them to a good deal of money. Specifically, each of the music giants had signed a "Digital Download Sales Agreement" that provided Beyond Oblivion access to their music catalogues. In exchange, both Warners and Sony were to each receive $50 million in initial payments.
The debtor disputed the claims on the grounds that the contract language and expectations of the parties meant that payment would only become due after a commercial launch. Warners and Sony disagreed, threatening to bring a breach of contract lawsuit that would have tied up the debtor's hopes of emerging from bankruptcy clean.
On Monday, in bankruptcy court, the parties announced a deal: The claims of Warners and Sony would be allowed, but the two companies would collectively obtain recoveries capped at 60 percent of the net cash proceeds of the sale and 50 percent of the net proceeds of a GBH loan.
In other words, Warners and Sony have given up claims worth just over $100 million in exchange for $1.5 to 2 million each of cold, hard cash.
A judge still needs to OK this settlement, but it could go a long way towards bringing Beyond Oblivion back from, you know.
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