Online Music Players Singing New Tune


Back in June, things looked grim for ad-supported online music services. SpiralFrog, well-funded and heavily hyped, had already gone belly up. Pioneering Web radio outfit Pandora warned it would likely shut down. And in April, social music site imeem, which had over $20 million in venture backing and deals with the major labels to stream songs and split ad revenue, was forced to deny rumors it would soon shut down. The economics of ad-supported music simply weren't working.

Just two months later, however, the sector's prospects are considerably brighter. Like any endeavor dependent on ad dollars, times are tough, but the more prominent digital music platforms appear to have weathered the downturn. They have renegotiated deals with the music industry on more favorable terms and developed innovative ad integrations that have enticed some big brands -- moves that have helped put them on the path to profitability. Even MySpace, beset on all other fronts, points to its year-old MySpace Music unit -- which boasts 25 million visitors per month, according to comScore -- as a point of pride. And there's a much-hyped new entrant to the space, European-based Spotify, which has received rave reviews and is reportedly closing a $50 million funding round for a U.S. launch.

The biggest boost to ad-supported sites is the shift in the economics of streaming music. Simply put, they were paying way more for the rights to stream songs than they were recouping in advertising. Every time a user streamed a song, imeem, for instance, had to pay the labels about a penny. That quickly added up, while Web ad rates stagnated or fell.

Pandora, which lets users create a custom radio station rather than stream specific songs, paid under a different agreement, which it claimed also demanded too much money.

Both companies, which warned the music industry that their businesses were unsustainable, recently received lifelines: imeem came to a new agreement with labels and Pandora renegotiated its fees.

"You had an upside-down equation," said David Wade, head of ad sales at imeem and a former SpiralFrog executive. "We were just starting out on the ad side of our business, but we had a 2007-era [royalty system]."

With their cost base hammered out, the key question for these sites is whether they can generate enough ad demand for their audiences.

"A pure advertising play hasn't panned out from a revenue standpoint because [these sites] haven't been able to generate the audience necessary," said IDC analyst Susan Kevorkian. (Imeem and Pandora, for instance, each attracts less than 7 million users a month.)

But for ad-supported music to work as a viable business, major brands need to see value. Otherwise, the sites will be forced to sell the majority of their inventory to ad networks, getting nickels per thousand impressions -- not nearly enough to pay licensing costs. That means a premium has been placed on deep integrations.

Wade said he sees imeem developing as a valuable go-between for brands wanting to hook up with an artist. Most other ad campaigns go well beyond the banner, said Wade, who notes display units are typically used to support a deeper integration. Dr Pepper's current campaign on imeem includes a remix contest, an album preview, download giveaways and celebrity playlists. Imeem is also adding in live events, with the "Truth" campaign recently sponsoring a free live show in Los Angeles that was Webcast on the site.

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