January 9, 2008 1:47 PM PST
Roadblocks en route to free, legal music
A handful of analysts are calling for the music industry to focus less on CDs, digital rights management, and subscription services, and more on giving their product away for free. Whatever gold that is still left to be mined from the music industry is supposed to be had through advertising revenue, according to some.
But exchanging songs for ad money is a frightening proposition for music executives who have depended on hawking discs for decades, and are still putting up major roadblocks for the free, ad-supported model. Couple that with less-than-stellar execution on the part of companies trying to give music away, and you have a business model still trying to get into first gear.
"The major labels must embrace an ad-supported model for downloadable music," wrote Pali Research analyst Rich Greenfield last week. "We sense they have no desire to do this."
Indeed, one of the problems is that some of the services in the free-music sector have been less than impressive: Some of the competitors have been plagued by operational troubles. Some were forced to delay launching for months while others have suffered financial setbacks.
New York-based SpiralFrog, once the most famous player in the free-music arena, recently announced that it took another loan, this time for $2 million. And when SpiralFrog launched last September, about eight months later than originally planned, it debuted with music from only one of the top four labels.
Then there are the numerous restrictions set by the services that hinder people from easily accessing songs. How good is a free-music deal if users are prevented from downloading songs to an iPod, forced to fill out questionnaires before they're allowed to listen, or have to be a college student to get access?
Consider that none of these hurdles exist at illegal file-sharing sites.
While some of the bigger names, such as SpiralFrog and Ruckus Network, were touted by the media as iTunes-killers, they have yet to really confront their main competitor: peer-to-peer networks. What the record companies really want from free-music players is for someone to come up with an attractive alternative to piracy.
A happy medium?
Amid all the uncertainty, one new player has won kudos for thinking up a business model that is both palatable to the big recording companies and has attracted a large following.
Imeem, billed as a social-networking site, has seemingly emerged out of nowhere as a front-runner in ad-supported music. The media only began taking notice after Imeem announced it had struck licensing agreements with all the top labels, locking up the final deal last month with Universal Music Group. The company is also venturing into video.
The 70-employee Imeem said Tuesday that it would soon begin streaming video of The Daily Show with Jon Stewart and VH1's Best Week Ever as well other Viacom-owned shows.
"We think (streaming music) will explode," Rio Caraeff, executive vice president of Universal's digital unit, told The New York Times last month. "I think you will see ad-supported streaming models continue to proliferate with companies both large and small."
What the labels get from Imeem is access to its 20 million unique users and a site growing by 1 million visitors a month, according to the company. Imeem also splits ad revenue down the middle with the record companies. In addition, the labels don't have to worry about piracy because the start-up only streams songs. There aren't any downloads to share on peer-to-peer networks.
In exchange, Imeem users can listen to an unlimited amount of music on their PCs or Macs--provided they don't mind advertising--making it an unprecedented music-discovery tool for social-networking sites.
If users want to own the music, Imeem provides links to iTunes or Amazon.com's download store.
"Imeem's delivery agreement with the labels offers a serious reset of the online music market," Gartner analysts Mike McGuire and Andrew Frank wrote in a report last month. "Important is the fact that the Imeem team is not trying to ignore or unseat the dominant player in the online music market: iTunes."
Some of the other free-music services are:
Ruckus Network, which was the first ad-supported music service to boast licensing deals with all of the top labels. Ruckus got a nod from the recording industry because of its focus on college students, a demographic that is particularly prone to swapping music on peer-to-peer sites. The service is available at more than 1,000 universities and, unlike with Imeem, users can move their downloaded music to several brands of digital music players--but not iPods.
Ruckus also doesn't allow users to burn music to CDs, and once students graduate they have to start paying a fee for the service.
SpiralFrog, which was once the poster child for free music. In August 2006, the company generated plenty of headlines by promising to wean peer-to-peer users off file sharing. Since then, SpiralFrog has delayed launching its Web site, saw much of its top management depart, and has struggled with a financial crunch that has forced managers to borrow money.
The company reported that for the quarter ended in September, it lost $3.4 million while generating revenue of $20,400. The good news for the company is, at that point, it had been doing business for less than a month. The bad news is that SpiralFrog is in debt and has limited funds to help pay for new licensing deals with the big labels.
A company representative said the service continues to grow and has 950,000 unique visitors.
Qtrax, which is another company that has struggled to get off the ground. According to The Times, Qtrax was schedule to launch last fall but has yet to debut. The buzz going around now is that it'll be ready sometime in the next month. The service works just like a peer-to-peer system by scanning the Gnutella file-sharing network. The difference is that Qtrax will only reveal song files that the company has permission to play. A song search will also display relevant advertising.
It should be noted that Napster and RealNetworks' Rhapsody music service allow users to listen to a limited number of songs for free but they haven't generated much buzz. Yahoo CEO Jerry Yang said in October that the company is planning a foray in ad-supported music.
"We have de-emphasized our focus around subscription music in favor of advertising-supported music," Yang said when the company reported its third-quarter results.
To thrive in the free-music realm may mean convincing record labels that free doesn't mean devaluing music. Gartner's McGuire and Frank recommend a hybrid approach: a little advertising combined with a pay-per-download offer.
"Is there a happy medium between devaluing the art form and creating a meaningful revenue stream from delivering ads?" McGuire and Frank asked in their report. "Sure, and these systems have to exist side by side with the direct-pay model offered by entities such as iTunes."
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