Google CEO Eric Schmidt celebrated the launch of music-video site Vevo in New York and he doesn't appear worried that his company might be helping create a future YouTube competitor.
(Credit: Greg Sandoval/CNET )NEW YORK--Eric Schmidt's presence at a swanky music industry gathering was an illustration of how far digital technology has come and the power it has amassed.
A decade ago, the film studios and top record companies dismissed Northern Californians as a bunch of bearded dweebs who liked electronics. Five years ago, with illegal-file sharing spinning out of control, the entertainment industry looked on techies with fear and loathing, invaders to be repelled before they made off with the treasure. It wasn't that long ago that some in Hollywood considered Google a "rogue company."
Pfft. That's all in the past. On Tuesday, at a launch party for music-video site Vevo, the Google CEO was an honored guest. Schmidt was seated front and center in an area reserved for music industry titans and major recording stars. He rubbed elbows with singers Shania Twain and Sheryl Crow. He chatted up record producer and label exec Jimmy Iovine. He sat and visited with Doug Morris, CEO and chairman of Universal Music Group, the largest of the four top recording companies, as well as the chiefs of Sony Music Group and EMI.
And why shouldn't they show him some respect? Not only is he at the helm of the most successful advertising company in the world and operating YouTube, the Web's No. 1 video site, but Schmidt is also helping to get Vevo off the ground. Instead of trying to stand in the way of a music-video site that is in many ways breaking away from YouTube, Google is providing the service with technological expertise and allowing it to continue to market to YouTube's massive following.
What's that? Google booked $21 billion in revenue in 2008. How can a company like that be satisfied to play rhythm guitar in someone else's band?
At the Vevo party, Schmidt said Google couldn't be happier with the situation. This is what he's done for over a year now, held out his hand to big newspapers, film studios, TV networks, and book publishers. By taking a backup role in Vevo, Google sends a message that the rogue image is garbage and the company is prepared to go a long way--even give up decision-making power--to help partners grow their businesses. No threat here.
In many entertainment circles, that message may resonate, especially the ones where the digital revolution has laid waste. Some of the celebs at the Vevo launch were only too happy to tell Schmidt and everyone else how badly recorded music has suffered.
"We've come here to mourn the death of an old cash cow that was the music industry," U2's Bono told the audience during his speech.
"Let's hope Vevo can help salvage something that used to be amazing," said singer Mariah Carey.
If you're anti-copyright and this makes you long for the days when Google and YouTube used to wave the Digital Millennium Copyright Act in the faces of Viacom, NBC Universal, and others that demanded YouTube remove unauthorized film and TV clips from its site, well, it's time to move on.
For more than a year, YouTube's strategy has been to strike partnerships with the top studios, record companies, and TV networks.
Doug Morris, Universal Music Group CEO and the man who came up with the idea for Vevo, waits to shake Schmidt's hand at the Vevo launch party.
(Credit: Greg Sandoval/CNET )YouTube has content deals with MGM Studios, Sony Pictures, Lionsgate, CBS (parent company of CNET), and all four of the major recording companies.
What probably drove Google to take a softer stance was competition. There might have been a period a couple of years ago when Google could have easily morphed into a video-on-demand service, offering feature films and TV shows and been all things Web video. But it played hardball and NBC and News Corp. successfully came up with a YouTube alternative: Hulu.
The competition between the companies to obtain premium films and shows has been fierce. After pursuing a deal to get full-length content from Disney, Google saw Disney sign with Hulu. That was a bitter blow. Google isn't used to losing.
At the same time, Netflix has jumped into the fray. The Web's top video-rental service has deals with makers of set-top boxes that enable customers to watch streaming Internet video on their TV sets. Apple has a slice of this market as well.
Meanwhile, Hulu could have tried to woo the music labels away from YouTube. Hulu could try to capitalize on any lingering distrust of Google at the labels. Conspicuously missing from Vevo's launch party was Warner Music Group CEO Edgar Bronfman. A feud between Warner and YouTube led to Warner's content being pulled from the video site for nine months before the companies made up. But Warner has so far declined to join Vevo.
In addition, EMI recently penned a music-licensing deal with Hulu. EMI clips will appear on both Hulu and YouTube.
In his speech introducing Vevo, Universal Music's Morris was generous in his praise of Schmidt and Google. But the former songwriter also raised questions about who he was referring to when he said things such as "the best thing about Vevo is that it's our platform" and "no more middlemen" and "we can experiment with anything and everything we want. We don't have to ask anyone's permission anymore."
On August 1, 1981, a cultural and entertainment juggernaut flickered onto TV screens and rocketed out of obscurity with these six words: "Ladies and gentlemen, rock and roll."
With that, the iconic cable network, MTV, was launched and a popular entertainment category--music videos--was born. Now, 28 years later, MTV has largely abandoned the genre and the record industry is preparing for the debut of a possible successor.
On Tuesday, video start-up Vevo is scheduled to launch. Supported by three of the top four largest record companies (sources say EMI has agreed to provide content to the site) and backed by the technological muscle of YouTube, Vevo is a Web site that will feature videos from many of the world's biggest recording stars, including U2, Cold Play, the Black Eyed Peas, Lady Gaga, Avril Lavigne, Bruce Springsteen, and Pearl Jam, according to the site's backers.
The move comes three years after Google's YouTube began proving that the masses still love music videos. Professionally made music clips are by far the most popular fare on the Web's No. 1 video site, accounting for 14 of the 25 most viewed clips ever. The labels involved with Vevo boast a combined total of about 15 billion views on YouTube.
Much of the music industry, including a score of independent labels that have recently signed on to the project, think it's time for music videos to take the next step in their evolution. They want a standalone site packed with high-definition clips from marquee acts.
Don't look for any user-generated content on Vevo, according to Doug Morris, chairman and CEO of Universal Music Group, the man who came up with the idea for the service. He said he wants to offer music fans as well as advertisers a more polished digital stage. That's one of the main reasons the venture was built, to charge advertisers premium rates in exchange for premium content.
Another motivation for building the site was to give the music industry a greater say in what happened to its content.
In an interview with CNET last week, Morris made no bones about the fact that by launching Vevo, the music industry is serving notice: no longer will middlemen or third parties profit from the labels' video content without giving up a fair share.
"What we're really doing is taking back control of everything," said Morris, who operates the largest of the top four recording companies. "This is us taking control of our future...Vevo enables us to provide consumers with about 80 percent of all the music videos in the world. So, this is really like MTV on steroids. We're starting with that kind of audience. But now we're in control of it. We don't have to go through a middleman anymore."
The problem as defined by the music sector started with MTV and extends all the way to YouTube.
When MTV was created, everyone told the labels not to worry about getting paid because the cable channel helped promote artists. "It was good exposure," they were told. The experts said the same thing in 2006 when YouTube started to emerge as one of the Web's favorite music sources. For a long time, the record companies seemed happy to go along, even as MTV built a financial empire from the videos.
But this time around, the music industry can't afford not to be the one who cashes in. The rest of the business is in decline, as CD sales shrink and profit margins on downloads are sliver thin. Record execs have been criticized for not finding new revenue models, so that's what they are trying to do. They believe there's new money to be had from the videos, even as they readily acknowledge that getting to it hasn't always been easy.
Morris remembers seeing a video from a Universal artist posted to Yahoo a couple of years ago and asking one of his employees what the portal paid for it. The exec told Morris the video was considered promotional and Yahoo paid nothing.
Promoting what? The video was five years old and Yahoo was pocketing the ad money without sharing it with the creators, Morris recalled telling the employee.
"I then called up (former Yahoo CEO) Terry Semel," Morris said. "And I said, 'Terry, we want to be paid.' Semel replied 'Absolutely not.' Then, we took our videos down from Yahoo and AOL and their viewership declined, at which point they came back and they paid us. They paid us a percentage of a cent for each view."
Morris isn't implying that Vevo's music clips will no longer be used to promote music or that Vevo plans to charge to watch videos. No, they will still be offered to viewers free of charge.
What is changing is that music videos, which often cost tens of thousands of dollars to produce, won't be treated as loss leaders anymore--not in this economic environment.
Nonetheless, Vevo faces plenty of challenges.
Nobody has proven whether advertisers are willing to pay top dollar for online videos, even professionally made music videos. There's also the question about whether interest in the genre will wane just as did with previous generations of music fans. After all, MTV switched to reality shows for a reason, no?
Rio Caraeff, Vevo's CEO, says the music video is only one of the site's features. The obligatory playlists will be available but music lyrics will also be offered. Visitors will have more access to their favorite performers than ever and Vevo's video quality will be as much as three times as what is typically available online.
All these upgrades were absolutely necessary to draw the kind of top advertising dollar that label honchos seek, according to Caraeff. He said typical ad rates for Web video run somewhere between $3 and $8 for every thousand views. Vevo's mission is to attract rates of $25 to $40.
"Successful was how we felt about YouTube, in terms of the shear popularity of our programming," Caraeff said. "But what we felt was that there could be a better way to drive a business around it. Advertisers had some reticence and some reluctance to fully embrace music videos on YouTube. We felt that there was work to be done to restore the premium luster and really create a better experience for advertisers."
In the short run, look for Vevo to be an online music store where downloads are sold as well as the merchandise created by artists, such as clothes and perfumes. In the long run, a music-video subscription service could be rolled out, one that offers full-length concerts.
"I do believe we will have a subscription service where we will stream live concerts from all over the country to viewers for a monthly fee," Morris said. "This is futuristic. We have not built this yet, but we're working on it."
Executives of online music video service Vevo are close to finalizing an agreement that will bring content to the site from EMI, the smallest of the four top recording companies and the label of Coldplay, Katie Perry, and Norah Jones.
EMI's New York headquarters.
(Credit: Greg Sandoval/CNET)The deal between Vevo and EMI could be announced at any time, sources familiar with talks told CNET.
"EMI is in discussions with Vevo," EMI spokeswoman Jeanne Meyer acknowledged, though she declined to disclose the current stage of the talks.
Scheduled to launch on Tuesday, Vevo will soon be able to offer music videos and other content from three of the four top labels: Universal Music Group, Sony Music Entertainment, and EMI.
The only major record company not partnering with the venture is Warner Music Group. Sources said talks between Warner and Vevo continue.
Universal Music founded the service earlier this year, aiming to cash in more on the popularity of music videos. At YouTube, which is powering back-end operations for Vevo, Universal's videos have accumulated the most views of any YouTube channel.
Universal has long wanted a standalone site to showcase video content, which includes traditional video but may also include other video content produced by artists.
Of YouTube's 25 all-time most watched videos, 14 are music videos. EMI recently signed a video-licensing deal with Hulu.
A court has hit pause on the sale of Beatles tunes from the Web site BlueBeat.
Judge John Walter of the U.S. District Court for the Central District of California late this week issued a temporary restraining order against BlueBeat after being petitioned Tuesday by the Capitol Records unit of music label EMI, which owns the Beatles' recordings.
The judge found BlueBeat's arguments "lacking in clarity" and wrote that the defendants failed to offer reliable evidence to support "their claim that they 'independently developed their own original sounds'."
As Matt Rosoff wrote this week for CNET, BlueBeat's claims have a good likelihood of being laughed out of court. The company's defense includes the assertion that it didn't post the exact Beatles recordings, but rather "psychoacoustic simulations" to which it added some video content, thus creating a new audiovisual work.
BlueBeat was offering Beatles songs and albums for purchase or download for 25 cents per track, in addition to offering free streaming.
"Given that the Beatles catalog, including the remastered Beatles recordings, has never been released by Plaintiffs for digital download or licensed for on-demand streaming, every day that Defendants offer the Beatles catalog for digital download or licensed for on-demand streaming irreparably harms Plaintiffs' exclusive right to control the use of its copyright materials," the judge wrote in his order.
EMI was not available for comment, nor was BlueBeat, whose Web site has been offline throughout the day Saturday. Offline as well were BlueBeat owner Media Rights Technologies and an affiliated company called BaseBeat, both of which also are listed as defendants, along with MRT founder Hank Risan.
Besides Capitol Records, the plaintiffs include Caroline Records, EMI Christian Music Group, and Virgin Records America.
The court set a hearing for November 20.
Record label EMI this week announced that it will begin selling on-the-spot recordings of concerts.
The name of the initiative, Abbey Road Live, is a bit misleading--it doesn't have anything to do with the Beatles album or the recording studio after which it was named.
Rather, EMI is using its Abbey Road brand to indicate that these aren't low-quality bootlegs but professional multitrack recordings, mixed and mastered on the spot, and sold on CDs, DVDs, or flash drives to fans at the venue. EMI also said on Wednesday that it plans to make the recordings available as streams or downloads, so fans can access them from home.
Instant concert recording isn't new: EMI sub-label Mute Records has had a similar program in place since 2004--according to the press release, 10 percent of fans at a recent Blur concert downloaded the show afterward--and Willie Nelson has been selling flash drives with on-the-spot concert recordings for several years.
But having a large record label like EMI on board legitimizes the practice. It's a no-brainer way for live acts to earn some extra cash--and great for fans as well. I can think of many concerts I've attended, after which I would gladly have paid another $20 for a recording. This should become standard operating practice in the next couple of years.
Update: 5:42 p.m. PT: To include information about a witness being compensated by EMI.
The copyright lawsuit filed by major recording company EMI against Michael Robertson, founder of MP3tunes.com, took an unexpected turn on Friday.
A U.S. District judge will allow EMI to file suit against Robertson personally--not just his company, MP3tunes, according to a copy of the judge's decision. Besides accusing MP3tunes of violating its copyright in a suit filed in November 2007, EMI also named Robertson as a defendant.
A year ago, a judge in the case threw out the copyright-infringing charges against Robertson, but on Friday, Judge William Pauley, for the U.S. District Court of the Southern District of New York, decided to let EMI once again name Robertson as a defendant.
Michael Robertson, founder of MP3tunes.com
(Credit: James Martin/CNET)The reason for the switch was the new evidence provided by MP3tunes' former president. In April of 2008, Emily Richards gave a deposition. In July of this year, 10 months after she left the company, she gave another one. In the latter testimony, Richards said Robertson was making a lot of the decisions for the company and that Robertson handled "technical, product decision, and legal matters without her involvement." This, argues EMI, shows that Robertson exercised control over MP3tunes and this should allow it to bring a suit against him personally.
MP3tunes, which allows users to store their songs in a digital locker and access them from any Web-enabled device, argued that this statement was consistent with Richards' earlier testimony. The judge didn't buy it.
"From the court's review of both depositions, it is clear that Richards provided new testimony," Pauley wrote.
Robertson said on Monday afternoon that the difference between Richards first deposition and her last was that EMI paid her $10,000. An EMI spokeswoman could not be reached for comment.
In Pauley's decision, he notes that EMI agreed to compensate Richards for "documented legal fees and costs up to $10,000" as well as pay expenses for her lawyer. The judge apparently saw nothing wrong with the arrangement. Pauley however noted that Richard testified that she left the company at Robertson's request, a fact that "bears on her credibility."
The good news for Robertson, who also founded MP3.com (now owned by CNET publisher CBS Interactive) and Linspire, is that Pauley threw out one of EMI's copyright claims. EMI's other claims, however, will be allowed to proceed.
Robertson, who in the past has called EMI's attempts to sue him personally "despicable," said that EMI's attempts to go after his personal assets is the music label's newest way of discouraging technologists from developing businesses that use their content in ways they don't like.
"We want to argue the merits of the case," Robertson said. "They want to drag it out...people should be able to store their music online."
The case is scheduled to go to trial in March.
Grooveshark, my favorite free music streaming service, made an important announcement earlier today: the company has settled a lawsuit brought against it by EMI, one of the big four record labels, and has licensed EMI's catalog.
The company is still negotiating terms with other copyright holders, but to my knowledge EMI was the only one that had sued Grooveshark. So with this legal uncertainty out of the way, I can more confidently recommend Grooveshark's $3-a-month premium service, which offers early access to new features (the latest update includes better organization of search results and a slider to move you to particular parts of a song). If other licensing deals follow, Apple might finally approve Grooveshark's planned iPhone app, offering on-demand streams from Grooveshark's massive user-sourced music library.
Peter Sunde Kolmisoppi, Fredrik Neij, and Gottfrid Svartholm Warg.
(Credit: The Pirate Bay)
Media companies will struggle to grab any money owed by The Pirate Bay, as Sweden's official debt collector found that three of the four founders have "no attachable assets" in that country.
In April, a group of 13 media companies, including Warner Music Group and EMI, asked the Swedish government agency, commonly known there as the "bailiff," to collect more than 30 million Swedish Kronor, or about $4 million on their behalf.
This was the amount the media firms were awarded by a Swedish judge after finding four men associated with The Pirate Bay--Peter Sunde Kolmisoppi, Fredrik Neij, Gottfried Svartholm Warg, and Carl Lundstrom--guilty of copyright violations. The men were also sentenced to a year in prison.
But on Monday, the Swedish newspaper Di.se, reported that the bailiff can't find anything to collect for Neij, Warg, and Lundstrom. In addition and perhaps most importantly, the bailiff rejected claims made by the media companies that Reservella, the firm listed as the official owner of The Pirate Bay, is a shell company controlled by The Pirate Bay founders.
The decision by the bailiff might have more significance if the acquisition attempt by Global Gaming Factory X, the software maker and operator of Internet cafes, didn't appear doomed.
In June, Global Gaming announced it had agreed to pay about $8 million, half in cash and half in Global Gaming stock, for The Pirate Bay. Global Gaming CEO has said for weeks the deal would be completed by this Thursday. The transaction appears seriously threatened now after Swedish exchange officials halted trading in the company's stock on Friday over concerns about whether Global Gaming has adequate financing to complete the purchase. There is also a criminal investigation into possible insider trading involving the company's stock.
Questions have also been raised about the accuracy of some of the claims made by Global Gaming's CEO Hans Pandeya. One example is that he said he received a $10 million bid from Napster co-founder John Fanning, uncle of Shawn Fanning. The elder Fanning denied Pandeya's claim.
One part of the claims made by the entertainment industry is that the founders were the ones who negotiated with Pandeya and other Global Gaming leaders. Sources close to Global Gaming told CNET this weekend that Pandeya finalized the agreement with the founders.
According to Di.se, Pandeya has told the bailiff that he doesn't know who is behind Reservella. The major music labels have pressured Pandeya to turn over any money he pays for the site to them. The Pirate Bay's founders have denied owning The Pirate Bay since 2006.
The bailiff said it could not connect The Pirate Bay founders to Reservella and just because they oversaw negotiations, doesn't prove that Reservella is a dummy corporation, according to the report in Di.se.
Should Pandeya come up with the money for The Pirate Bay, it's unclear whether the music and film industries could require him to turn it over to them.
On September 9, the Beatles will release their entire catalog, digitally re-mastered for the first time, on CD. The same day, The Beatles: Rock Band will be released, and there is speculation of an Apple music-related event the same day. Could it be an entertainment perfect storm?
(Credit: The Beatles)What is it with the Beatles and nines?
As my colleague Caroline McCarthy pointed out in March when the launch date (September 9, 2009) for The Beatles: Rock Band was announced, the band's song "Revolution 9" ends with the words, "number nine, number nine, number nine."
So clearly, the date 09/09/09 has at least some symbolic significance for the band. And now, in addition to that date being the launch of the Rock Band title, it was announced Tuesday that on that same day, the Beatles will release a CD box set of their entire catalog, digitally re-mastered for the first time, re-confirming reports from months ago.
At the same time, many people have been talking about the high likelihood of an all-music-related Apple event around some unknown product announcement on September 9. So, with all these facts--and some informed speculation--in hand, one has to think seriously that we may get a star-studded event with Paul McCartney and Ringo Starr (who, you may remember, showed up at Microsoft's E3 press conference to promote The Beatles: Rock Band) and, of course, Steve Jobs, to announce the availability of that same digitally re-mastered catalog on iTunes.
If that were to come to pass, it would seem to me an entertainment perfect storm. Of course, as is always the case with these things, we have to temper our enthusiasm because the most exciting speculation could well turn out not to be true. But if it does happen like this, well, it would easily be worth the price of admission.
As for today's news, EMI Music and Apple Corps--the Beatles' publishers--said that it took engineers at the famed Abbey Road Studios four full years "of utilizing state of the art recording technology, alongside vintage studio equipment, to create these amazing re-masters."
Having talked to the folks behind both The Beatles: Rock Band and the Cirque du Soleil's Beatle-themed "Love" about the re-mastering processes, I know that this is something that those involved with the band have been putting a lot of effort into over the last few years. And assuming that there will be a digital distribution element to this whole 09/09/09 thing, it's nice that after being very strict for years and years about how their music got out into the world, the band may finally have agreed to loosen the reins a little bit.
Of course, it's not altruism. There will no doubt be massive amounts of money flowing into the coffers of everyone financially involved with the band. And that's because even for people like me who already own the entire catalog on old mono CDs or records, there may be a few extra dollars available for legitimate digital copies of songs like "Hey Jude," "Yesterday," and "A day in the life."
But, of course, as of today, we don't know anything for certain about the Beatles and iTunes. What we do know is that The Beatles: Rock Band will have 45 songs, and that the digitally re-mastered CD collection will comprise all 12 Beatles studio albums--in stereo, no less--as well as "Magical Mystery Tour" and a combined "Past Masters Volume I and II," for a total of 14 titles on 16 CDs. The whole thing will be available, along with a DVD set of Beatles documentaries in one--presumably pricey--stereo boxed set.
Three years ago this month, the Financial Times and The New York Times chronicled the emergence of an untried but promising new digital-music service: SpiralFrog.
Some of the hurdles that contributed to SpiralFrog's spiral out of the sector are the same confronting former rivals.
The start-up would offer music free of charge to consumers and attempt to hand the bill to advertisers. Since then, we've seen a dozen companies make names for themselves by offering their own twist on the ad-supported music model, including MySpace Music, Imeem, and Pandora. But regardless of how anyone has tweaked it, not a single service in the still-nascent sector has proven that it knows how to offer consumers a compelling free-music service while providing advertisers an effective way to deliver their messages.
Music fans generally refuse to pay to listen online and resent on-site advertising. The hard truth is that to this point, ad-supported music as a standalone business has failed.
Ruckus and SpiralFrog have closed their doors. Imeem faced a financial crisis earlier this year, until receiving new funding from investors and price concessions from the music labels. A year after Qtrax obtained licenses from all four of the top recording companies, the company appears to be struggling to pay its bills and has yet to launch.
In May, CNET News reported that MySpace Music's performance has underperformed. Several music sites have overhauled their business models (Lala) or are trying to do so (iLike).
Pandora's popular iPhone app, meanwhile, has helped spur user growth, but the company has also opted out of ad-supported music for the site's heaviest users. The company said last month that those tuning in for more than 40 hours a month must pay 99 cents to continue listening.
And if you're waiting for the Swedes, in the form of white-hot music service Spotify, to come charging over the hill to show us how to make the model work, you needn't bother. Three industry sources told CNET News last week that the service--expected to debut in the United States next year--is struggling to convert users into paying customers. Just like others on this side of the Atlantic, Spotify hasn't figured out how to make money.
CNET News has recently completed a two-month examination of SpiralFrog, the now-defunct download service that was among the pioneers of the ad-supported model. The review provides an unprecedented view of the many challenges facing companies in this sector. SpiralFrog's tale sheds light on the kind of rates advertisers are willing to pay and the licensing fees the top music labels charge. None of it is very promising.
There's no doubt now that the much-hyped SpiralFrog was never among the front-runners. The service offered music from only two of the four top recording companies. Users couldn't download SpiralFrog's tunes to their iPods. And documents show that the start-up spent millions of dollars on marketing but never attracted a loyal following of significant size.
There may be a temptation to dismiss SpiralFrog's problems as unique to the company. That would be a mistake. There's no question that some of the same factors that stymied SpiralFrog are bearing down on many of the company's former rivals. "This version of ad-supported model is certainly on life support," said Mike McGuire, an analyst at research firm Gartner. "I think we can say this round didn't quite work."
Migration to downloads
One sign that some players in digital music are losing faith in the ad-supported model is the rise in companies looking to sell downloads, according to one music industry executive. "That's become the fallback position," the source said.
A copy of a $1.8 million bounced check written by Qtrax to Oracle, which filed a breach of contract and copyright lawsuit last month against the yet-to-be-launched music service.
(Credit: Screenshot by Greg Sandoval/CNET)All four of the major music labels declined to comment for this story.
Imeem, which has mostly focused on streaming ad-supported music to users' PCs, has recently begun testing a download store. Music industry sources told CNET News last month that iLike, which powers Facebook's most popular music service, was in talks with the major record companies over licensing downloads.
For two years, Imeem has posted links to Apple's iTunes and Amazon.com's MP3 service on its site to enable visitors a means to buy songs. MySpace Music, YouTube, Pandora, and Spotify do the same. But Imeem is testing how effectively it can sell a limited number of tracks from Warner Music Group and several independent labels directly to consumers.
Selling downloads directly, rather than linking to another retailer, is more lucrative. A music site that sells downloads can make 30 cents from direct sales rather than the 5 cents that the so-called affiliate partners pay, according to an industry source. The trick for any upstart download store is to convince customers of Apple's iTunes and Amazon's MP3 service--by far the leading download stores--to try a new outlet.
Nonetheless, the behemoth record labels are willing to work to help ad-supported sites survive. Imeem is the poster child for how the labels have changed their approach to these services. Founded in 2004, Imeem came very close to running out of money until it found new funding and also negotiated better licensing deals with the labels earlier this year. Some of Imeem's rivals asked and received similar concessions, industry sources said.
That hasn't stopped the complaining, however. The people who run digital-music stores continue to quietly argue that licensing fees charged by big record companies are still too high for stores to eke out a profit. Music industry insiders say it's not their fault that the start-ups have failed to win over advertisers. What are they supposed to do--give their content away? That won't happen, executives say.
Overpaying for music
CNET News' review of SpiralFrog showed that in 2006, SpiralFrog agreed to pay $3.2 million to Universal Music Group, the largest of the top four recording companies, in up-front fees. Documents indicate that in 2008, SpiralFrog set aside $3.5 million to license music from EMI, the smallest of the major labels. That deal triggered a "most favored nation" clause in Universal's contract, and SpiralFrog ended up paying an additional $1 million to Universal.
From a SpiralFrog June 2008 expenditure list. Note: SpiralFrog had no licenses with Warner or Sony. Figures represent amounts the start-up expected labels to charge.
Although SpiralFrog managers never secured deals with Sony Music Entertainment or Warner Music Group, the music service budgeted $5 million and $3.3 million, respectively, to acquire licenses from those services, records show. Those figures were all minimums. Under the agreements reached with Universal and EMI, had SpiralFrog made revenue above those minimums, the company would have been required to split that revenue 50-50 with the labels.
By the time SpiralFrog compensated the labels and music publishers, the company's managers figured that 66 percent of their revenue went to the music industry, records show. SpiralFrog's deal with the major labels was different from those negotiated by most music-streaming Web services, which pay penny-per-play rates. Their agreements are to pay a cent, or some fraction of a cent, each time a song is played.
It appears that it made little difference whether the record companies got their money before or after a sale. The rates they charged forced ad-supported companies to generate big ad revenue in order to cover costs.
SpiralFrog, for its part, never came close to covering costs, documents show. The start-up lost more than $26 million in 2008.
Advertisers are simply unwilling to pay the music sites a premium rate. In order to charge advertisers $10 for 1,000 impressions, ad-supported sites must operate their own sales teams, which is expensive. In SpiralFrog's case, the company's salespeople were successful at signing a few marquee advertisers, including McDonald's and Microsoft, but much too often, the company found itself selling excess ad inventory through remnant ad networks, which typically pay 50 cents or less for 1,000 impressions.
Advertisers aren't willing to give the ad-supported sites top dollar because they know that people aren't necessarily staring at a computer while listening to songs online. Instead, they tend to check e-mail or Facebook, do homework, eat dinner, or browse the Web in other browser tabs. In contrast with radio, Web listeners have become accustomed to music without audible ads embedded into the streams--and they don't want those ads, according to Gartner's McGuire.
Another gripe that advertisers have is that many ad-supported sites don't reach big enough audiences. Mel Schrieberg, SpiralFrog's former CEO, said SpiralFrog couldn't get in the "tier 1" advertising door with fewer than 5 million users. To generate this kind of traffic, SpiralFrog spent $11 million in 2008 on search engine and affiliate marketing, which gobbled up the little revenue the company was able to generate.
But Susan Kevorkian, a digital-music and mobile-entertainment analyst at IDC, points out that a large audience doesn't mean instant success. Although MySpace Music has access to the social network's shrinking but still large audience, she said the service still "hasn't performed to industry expectations."
Is there any hope?
One bright spot is that some investors are sticking with the sector.
In addition to Imeem, Spotify and Pandora found new funding. Investors including British venture capital firm Wellington Partners were part of a $50 million round of financing for Spotify, according to the Financial Times. And Pandora last month announced that it had raised $35 million of additional funding.
Ali Partovi, iLike's CEO, argues that the ad-supported model works for music, but not when you're giving songs away.
"We've built a self-sustaining ad-supported business--positive cash flow over the past eight-month period," Partovi said. "That's with only one full-time ad salesperson. What's our secret? It's simple: we're not trying to help consumers get unlimited music without paying for it. Instead, we're focused on music discovery. We deliver all the other things that music consumers love without risking a lawsuit or paying high royalties."
That may be true, but iLike is among the companies discussing downloads with the music labels.
Click the image above to read the lead story of our series on SpiralFrog. Stories on SpiralFrog's internal strife and customers' private information will appear Tuesday.
Matt Graves, Imeem's spokesman, said his company is trying to be innovative and not solely rely on traditional online advertising, such as on banners and display ads. The company is trying to mix things up with in-stream audio ads and custom-tailored campaigns. The music service recently promoted a download giveaway from Wal-Mart Stores and offered users a chance to remix songs from artists such as rapper Flo Rida.
"If it's all about displays, then users will get ad-blind," Graves said. "We're enabling advertisers to do a deep integration."
IDC's Kevorkian agrees that until now, ad-supported music has failed, but she sees some possibilities.
"This model has some flaws that need to be addressed before it works as a standalone model," Kevorkian said. "That said, there's a possibility that it could be deployed in conjunction with a hybrid paid model to help generate revenue so that the music provider isn't solely dependent on ads."
