September 15, 2008 12:01 AM PDT

Does Facebook have an answer for MySpace Music?

by Caroline McCarthy

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With the launch of the much-anticipated MySpace Music expected within the week, tech industry wags are already asking if MySpace's archrival Facebook has its own "social music" strategy.

Now Facebook, despite bouts of indecision, may be leaning toward a plan: The social music service iLike announced Monday that Radio Retaliation, the forthcoming album from electronica duo Thievery Corporation will make its exclusive debut Thursday on its site. (It probably wasn't a coincidence that Thievery Corporation was the headlining musical act at Facebook's F8 conference in July.)

iLike became a runaway success on Facebook's platform and was selected as one of the social network's preferred "Great Apps" at F8. The music site has debuted albums before, most notably R.E.M.'s Accelerate in February, but this one will be officially promoted by Facebook in a "listening party" that lasts until the album's wide-release debut on September 23.

Facebook's choice to openly promote iLike as a "Great App" and enter into an album release partnership is a distinct shift away from the "neutral platform" image that Facebook has cultivated in the past. So does this mean that Facebook is finally going to embrace music?

Officially, the answer is a coy maybe. "For Facebook to start doing more things with iLike is definitely in the direction of keeping things pressing forward," Ali Partovi, co-founder and CEO of iLike, said in a phone interview last week. He described the Seattle start-up's relationship with Facebook as "ongoing and deep." Facebook representatives produce a standard "no comment" on future plans, except to say that digital music is a niche that the company continues to explore.

Unofficially, the answer isn't all that different. Music industry sources say Facebook has been notably indecisive about its music plans, frustrating industry executives who would love to have another major digital outlet for their music, despite their investments in MySpace's planned music service. It's gotten so bad that executives at one major recording label call Facebook's clumsy two-step of initial enthusiasm and meetings that lead nowhere "the Facebook dance."

A straight-up music service, or some other kind of potentially lucrative music strategy like promotion or ticket sales, hasn't been as natural a fit for Facebook or, for that matter, MySpace (perhaps that will change this week, of course, for MySpace).

This struggle has been going on since 2004, when the creators of Facebook--then a small site limited to students with e-mail addresses from a select number of U.S. universities--built a side project called Wirehog. Now mostly forgotten, Wirehog allowed Facebook members to share their music libraries and other files with people on their friends lists.

Wirehog, which was cross-promoted on Facebook and used the same user credentials but was never officially a part of the site, didn't last long. With obvious potential legal issues, the service was suspended in early 2005.

Company insiders say the music debate has been going on inside Facebook since then. For a while in late 2007 and early 2008, it looked like a Facebook music service might be on the way as rumors spread that the company was negotiating with labels and looking to hire a "music czar." But the most that came out of it publicly was Facebook's "Fan Pages" feature, which were marketed to music artists as well as to other brands, movies, television shows, and products.

With MySpace Music on the way, and entertainment-focused social sites like Imeem and Buzznet making headlines, the pressure is on Facebook to finally make up its mind. One source within the digital music industry said to expect more aggressive music initiatives from Facebook in the next three to five months. Another said that in addition to iLike, Facebook has met with subscription-music companies Napster and Rhapsody. Both make sense: Rhapsody has partnered with iLike to provide full-length music playback, and early Napster exec Sean Parker was Facebook's first president before he left to join the Founders Fund, the venture firm run by Facebook investor Peter Thiel.

"All social networks are aggressively looking at adding social music features to their experience, said one executive in the digital music industry who asked not to be named. "I think for the last six months I've really seen almost every social network out there, the top 20, all making moves to go after social music."

The ad industry, still lukewarm on the prospects of getting good click-through rates from display ads on social profiles, will be more upbeat about serving their inventory on music-related content, the executive said. Entertainment, even digital entertainment, is a more familiar playing field.

Now, there is plenty of "social music" on Facebook. iLike's application is one of many: Imeem, Pandora, and Last.fm (which is owned by CBS, publisher of CNET News) all have applications on the platform. Many bands have created "fan pages" on Facebook, though MySpace remains the hub of choice for most band promotion in the U.S.

But this is where the advertising issue comes up again: Facebook does not charge for external applications on its platform, nor does it take a cut of the revenue. In spite of its ongoing development of "Social Ads" as an alternative to display advertising, advertiser confidence in Facebook and the social-network industry as a whole remains low.

It's not clear how much money changed hands in the Radio Retaliation promotion, but suffice it to say that Facebook would probably make a few bucks if it became known as a hub for promoting and previewing new music. That's one area where MySpace is still the leader--parent company Fox Interactive Media was recently estimated to be the biggest market for display advertising on the Web, regularly pulling in flashy ad packages from movie studios, automakers, and even high-end luxury brands. With a renewed focus on media and entertainment, it's a friendlier destination for ads.

Additionally, Facebook executives have confirmed that the company is working on developing a payment system, something that could have huge implications for both third-party music companies on the site and Facebook's profit margin. If Facebook took a cut of the revenue from the use of a PayPal-like system on its platform, this could mean a lot for sales of songs, tickets, merchandise, and the like.

"Because we're one of the 'Great Apps,' one of the benefits of that includes getting early access to any new features before other applications have access," iLike's Ali Partovi said when asked about how his company would take advantage of a Facebook payment system. "We haven't thought through exactly what the best scenarios are but I think something with respect to tickets would be something to consider."

Not everyone agrees that Facebook, or anyone else for that matter, should count on social music to help it make a profit. This could be why Facebook has hesitated for so long on the music front: it knows it wants to make licensing agreements but isn't sure what the resulting product would be.

Imeem, iLike, and others including the forthcoming MySpace Music count on ad-supported free streaming, a trendy but ultimately unproven business model that one source close to Facebook said the company does not find particularly compelling. High profit margins from digital downloads or streams are "a bit of a fantasy," said another industry source who requested anonymity. "iTunes exists to sell iPods." Billboard magazine estimated earlier this year that iTunes is indeed profitable, likely pulling in between $160 million and $390 million, but that's pocket change compared to the multibillion-dollar iPod industry.

That leads to another reason for Facebook's indecision. Streaming music on Facebook has been a product of third-party companies rather than Facebook itself, and clever legal language in the terms of the developer platform means that Facebook is exempt from many of the legal issues that would require it to negotiate with the labels. Direct negotiations with executives who have caused Apple fits in its iTunes pricing decisions could prove unpalatable to the social site, and an industry source hinted that legal issues, not profit margins, were the driving force behind MySpace Music.

Facebook has thrived on offering products that are, for better or worse, major shakeups in the social-media world. It introduced the "news feed" as a means of social consumption, and the developer platform as a way to bring in outside services, both of which are now industry-wide offerings, and its "Beacon" advertising program made a splash, as well (though not exactly a positive one).

There's no question that Facebook would want a large-scale "Facebook Music" to be equally groundbreaking, but record executives still aren't sure of the social site's intentions. With the official "listening party" for Radio Retaliation, Zuckerberg & Co. are starting to drop a few hints.

CNET News' Greg Sandoval contributed reporting to this story.

Caroline McCarthy, a CNET News staff writer, is a downtown Manhattanite happily addicted to social-media tools and restaurant blogs. Her pre-CNET resume includes interning at an IT security firm and brewing cappuccinos. E-mail Caroline.