MySpace Music Could Shake up Digital Music

MySpace Music represents a promising next step in the tumultuous integration of the Web into the music business, but its success hinges on a number of far-from-sure bets.

Among the key question marks are whether MySpace Music will generate enough advertising revenue to justify its very liberal free-streaming model and whether users will develop a strong-enough attachment to a service that lacks mobile portability.

If MySpace Music succeeds, it has the chance to become the preferred model for distributing and consuming music, resulting in benefits for fans, artists, software developers, labels and advertisers.

While time will tell whether MySpace Music succeeds or fails, it's clear that the service is a compelling and bold alternative to existing approaches, thanks to an innovative blend of technology and business models.

Currently, digital music is dominated by Apple with its iTunes store and song management software, which is tightly coupled with its iPod players. However, iTunes only streams portions of the songs it has for sale, and it lacks a subscription model.

Smaller rivals such as Real's Rhapsody and Napster not only sell individual tracks and albums but also, for a monthly fee, give people the option to subscribe to their catalogues. The subscriptions typically allow people to transfer songs to their portable music players and keep them there as long as the membership is active. However, these services allow little free streaming.

Then there are the Web 2.0 social music sites, such as Imeem, which generally offer broader free streaming with a heavy community aspect so people can share their likes and dislikes with friends and discover new music that way.

MySpace Music edges out Apple, Napster and Rhapsody via its massive catalogue of songs that can be streamed, in full, free and without limits via a PC. All four major labels own stakes in the MySpace Music joint venture.

With a social network of about 75 million in the U.S., where the music service is now available, MySpace can provide a more extensive social experience than the Web 2.0 social music sites.

For purchasing songs, MySpace Music has an exclusive agreement with Amazon's MP3 store, but it also aims to be broadly open and agnostic by supporting a variety of media player software and portable music devices. All songs purchased will be free of digital locks.

An area where MySpace Music falls short is in mobile devices, where the service appears only in the form of purchased songs. If MySpace came out with a mobile version of the service that offered free streaming, it would seriously hurt fee-based subscription services from Napster and Rhapsody and become an even mightier competitor.

"In terms of what MySpace is delivering, they've done a great job of serving all of that up," said Russ Crupnick, vice president and senior industry analyst at NPD Entertainment, in an interview.

MySpace Music should be very compelling for consumers, since it requires no financial commitment via mandatory purchases or subscriptions, he said. It offers a tremendous song catalogue with no listening limits, plus the chance to discover new music via the site's social-networking capabilities.

Still, the limited portability of the service is a definitive negative. "Consumers really want to own and hold and transfer and use their music everywhere: at the gym, the beach, their computer, their car," he said. "It's the ownership and portability that will represent the biggest challenge."

Steve Pearman, senior vice president of product strategy for MySpace, said a mobile version of the service is definitely on the horizon, but that licensing and user experience issues need to get worked out.

"How far you can go into mobile is an incredibly blue-sky space. It's one you'll definitely see MySpace Music go into," Pearman said in an interview.

Before the labels allow MySpace Music to provide free mobile streaming, the joint venture will have to generate enough advertising revenue to justify the move, which would eat into subscription fees and sales of digital tracks, Crupnick said.

"If you give people full access to the songs via the computer and mobile devices, how do all the stakeholders get paid? I don't think there's enough ad revenue today to compensate for all the hundreds of millions of dollars that would be put at risk," Crupnick said.

Gartner analyst Mike McGuire also believes that before MySpace moves on to think about a mobile music service, it must prove that the PC-based service is sustainable via its main revenue driver, ads, as well as its other revenue sources. Those initially include song and ringtone purchases, and sales of tickets and merchandise will be brought into the mix later.

"What remains to be seen is whether the ad revenue over the next year or two can deliver something compelling," McGuire said in an interview. To accomplish that, the service has to be embraced by a critical mass of MySpace members.

Still, MySpace Music has the potential to shake things up. "Given their scale and some of the advertisers they signed on, and the link to the Amazon store, it'll be a very interesting addition to the online music market," McGuire said.

In a blog posting, Jupiter Research analyst David Card said MySpace Music could blend the discovery of music, the listening experience and the purchasing environment, and thus fulfill a key promise of online music.

"That's a good vision, right? Too bad there hasn't been any proven demand for it. Perhaps MySpace will tap that hidden demand -- they're in a very good position to do so," Card wrote.

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