Analysis: What model for music downloads?

full-length songs free of charge, with users allowed up to three
listens. As with the business model posited by Qtrax, record labels and
artists were paid from advertising revenues.

At first glance, this seems like a textbook example of record companies
giving away the crown jewels, or at the very least wilfully breaking the
psychological link between the consumption of music and payment. But the
truth is that the internet has forced the industry to rethink its
business models. CD sales are down and while the download market is
growing, legitimate transactions are still outstripped by illegal file
sharing. As Fiona Meldrum of brand consultancy Sparkler puts it: "There
is a whole generation of young people who don't understand the concept
of paying for music."

That's not universally true, of course. In your local branch of HMV or
Virgin, money continues to change hands. Meanwhile, iTunes has sold
something in the region of three billion songs since its launch and the
all-you-can-eat monthly subscription service offered by Napster
currently attracts 750,000 worldwide users. Nevertheless, Guilio
Brunini, chief executive of BrandAmp, a communications strategy
consultancy specialising in the interface between music and advertisers,
says the industry has been forced to consider ways and means to monetise
those consumers who crave music but who don't want to pay. "Record
companies have realised that consumer behaviour is changing," he says.
"And if they are to continue to be successful they have to adapt to the
demands of consumers."

Content deals

Hence the apparent willingness of major labels to consider licensing
content to ad-funded services. It's by no means a brand-new concept. In
the US, Spiralfrog boasts a free download catalogue of about 800,000
songs, while Britain's WE7 - a venture specialising in indie labels and
unsigned acts - has recently passed the two million download milestone.
But to date, the reach of these services has been limited by their
catalogues. A store along the lines of Qtrax would be a much bigger
proposition than Spiralfrog and potentially generate much greater
amounts of advertising revenue.

And, according to James Bates, director of media at Deloitte, scale is
all important if ad-funded download sites are to fulfil their potential.
"Qtrax says it has 25 million songs. If that's the case, good luck to
them because the first hurdle for any new entrant into the music
download market is legal access to a large library and quality content,"
he says.

However, as the on/off launch of Qtrax illustrates, licensing agreements
aren't always forthcoming and Bates believes that the Last.fm model is
probably more attractive to the industry than the Qtrax vision. "Last.fm
has a large user base and the on-demand service has a strong promotional
element," he says. "Those who use the site can listen in full three
times but are then directed to other sites such as iTunes to make a
purchase." In other words, the labels not only receive ad revenue but
also have the potential to make a sale.

Also attractive is the prospect of repeat revenue. Consumers must return
to the Last.fm site if they are to listen again, providing an
opportunity to serve more ads. "When someone buys a CD or purchases a
download, they pay once and that's it," says the company's head of
communications, Christian Ward. "With our model, the label and the
artist get paid every time someone listens to the song."

Brand opportunities

Music sites share the ability of social networks to build communities
and target tightly defined groups of consumers. According to Steve
Purdham, chief executive of WE7, his company's experience suggests that
any commercial messages can have a real impact. "We offer display ads
that have an average dwell time of ten seconds," he says. "But we can
also add audio ads to the beginning of tracks and they remain in place
for a month after download. Even with a distinctly non-mainstream
catalogue, it's a proposition that has already attracted advertisers
such as Microsoft and Virgin Wines.

There is, of course, the question of whether consumers will find ads
intrusive. Meldrum believes that is a danger but adds that if the medium
is used creatively, advertising and marketing activity centred around
downloads could hugely enhance the ability of brands to engage with
consumers.

"The opportunity is there for brands to become patrons of music," she
says. They can become associated with the provision of music." Brunini
agrees, and - citing Nokia's offer of a year's free downloads to phone
buyers - he argues this is already happening. "Nokia is playing a key
role in enabling access to music on the move," he says.

So does all this point to a day when no one will pay directly for music?
Thorsten Schliesche, vice-president of sales and marketing for download
pioneer Napster, thinks not. "We offer an a la carte download, a
subscription service and in the US we have an ad-funded model," he says.
"The ad-funded model is very hard to get right and we strongly believe
that subscription is the way forward."

For the moment at least, no one is expecting ad-funded models to carry
all before them. For one thing, not all genres sit easily with the
demands of advertisers and the inevitable licensing restrictions will
not suit every consumer.

"I don't think any model will dominate," says Bates. "It's a case of
horses for courses."

- See Live Nation feature, p30.