March 29, 2009 6:54 pm

Ads and labels deal double blow to music sites

Tumbling advertising revenues are laying waste to another wave of internet entrepreneurs as they struggle to satisfy promises of free music to users and cash flows to the labels that own the copyright.

Two popular services that allowed free listening, although not downloads, while providing a share of advertising money to record labels, have been forced to close down in recent weeks.

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SpiralFrog shut down on March 19 after borrowing millions from private investors, while Ruckus, another free service aimed at college students, pulled the plug in early February.

Larger rivals are struggling too, raising questions about advertising-supported businesses and leading some to blame the record labels for demanding millions of dollars in advance royalties, investment stakes or both as hedges in case their split of the advertising revenue comes up short.

Michael Bebel, who ran Ruckus says: “The labels have to understand that the ad market in this space is still developing,”.

“This means that they need to be happy with a revenue-share model that is not all that significant in terms of per-play.”

Even YouTube, the video-sharing site owned by Google, lost its deal for free use of songs from Warner Music in exchange for sharing advertising revenues.

The label felt it was getting too little cash and that YouTube was not doing enough to convert listeners into buyers.

YouTube also had to stop showing music videos in the UK because of demands that it should pay royalties each time a song was played, which it said was “simply prohibitive”.

David Kenny, managing partner at Vivaki, the digital unit of Publicis, advertising agency group, says . “It is hard to see a big business in ad-sponsored online music. There is not enough advertising to fund the cost structures of those businesses.”

So far, sales of tracks without any technological restrictions about where they are kept or what they are played on is the only business model that is working.

The music industry will try to squeeze more money out of Apple’s leading iTunes store next month, when Apple will begin charging $1.29 in the US for the most popular songs, up from 99 cents.

But that will not make up for the revenues missed through illicit trading.

“The market leader isn’t iTunes. The market leader is free,” says Ged Day, the founder of early download site Bleep.com.

Most remaining sites are desperately seeking new licensing terms and pursuing money in other ways, by encouraging song sales and other commerce.

One of the biggest, Imeem, reaches more than 100m users monthly through both its website and the small programs known as widgets that users can include on their own pages.

It cut jobs this month and reorganised in pursuit of new revenue sources.

Like SpiralFrog and Ruckus, Imeem allows listeners to hear songs but not download them.

It initially focused on advertising revenue and small referral fees for sending customers who wanted to buy digital songs to Apple and other retailers.

Since the dollars began to dry up last autumn, Imeem has pushed users to buy songs or ringtones for mobile phones. This month, it added concert tickets.

Matt Graves, Imeem’s vice-president says: “People can’t afford to be religious about their business model,”

Last.fm, a pioneer in music streaming that was bought for $280m by CBS in 2007, this month began charging for its online radio service in some countries.

Spotify is due to announce on Monday that it is forming a partnership with 7Digital to sell tracks, alongside its advertising-supported and subscription streaming services.

For now, the labels have their highest hopes for a joint venture with Rupert Murdoch’s MySpace, which has increased the number of song streams and could connect more users to ticket sales and merchandise, if the execution improves.

Even if that fails as well, industry veterans say the recession-driven shake-out does not mean that no advertising-supported model will ever work.

James Heckman, former chief strategy officer at Fox Interactive, MySpace’s parent company, says .“A lot of these guys are going to be wiped out, but everything that is happening right now doesn’t matter in the long run.

“This is a transformation period and I think there will be some winners.”

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