Grooveshark doesnt illegally stream anything. All of their music is licensed, and they pay fees on it. They also go to great lengths to protect there music from being easily ripped.

That's the only way to get started in areas of copyright monopoly.

Think of it like any startup not checking if there are patents they infringe. If you think there's nothing wrong with the patent system, then you should be "pissed" about that too. But sane people tend to not be.

It does seem like Grooveshark made a deal with EMI after getting sued, and a bunch of record labels. They seem to follow Youtube/Vimeo's use of indemnification (as in the users agree that the content they are sharing does not breach Terms of Service).

Does that mean this is legal? No, Universal and Pink Floyd (in addition to EMI) sued them and Grooveshark could not reach a deal with them. Apple even removed the iPhone app.

Nonetheless, Youtube started out the same way. I'm sure they will make more deals and become a legit company.

IMHO: A startup, while in its MVP stage, should go ahead and do whatever it takes to determine there's a customer demand for whatever product they are making. In Grooveshark's case, they should stream copyrighted works and find out what their customers want and what they're willing to pay for. Once they can determine a viable market, then it's time to get legal. This also will influence their business plan since what their customers may want to pay will not cover the costs of what it takes to produce their product.

Crunchyroll did the same thing with anime. They streamed fansubs and offered paid accounts with some benefits (I forget what exactly).

A while back they went legit and now have simulcasting deals with some of the anime distributors. You can get it the same day as Japan with your paid subscription, or get it for free the next week. At the same time, all of their old content was taken down.

I'm not saying I like this model, but it's been done before.