Ad revenue shores up newfangled Napster (Reuters)

SAN FRANCISCO (Billboard) - In their continuing struggle toattract music fans from iTunes, subscription music services areresorting to what made digital music popular in the first place-- a price tag marked "free."

This time, however, they have the support of the musicindustry, because these services are using online advertisingto compensate labels, artists and publishers for the rights totheir work.

The latest iteration of this strategy is the relaunch ofthe napster.com Web site. Previously, napster.com existed onlyas a place to download the company's software -- originally asa peer-to-peer application and more recently as a subscriptionservice. It is now presented as a complete music portal.Visitors can access and play any song in 's 2million-track library free for as many as five times; afterthat, they must buy the track or subscribe to the service.

"We never intended to be a Web-based experience," NapsterCEO Chris Gorog says. "But this was an effective piece of realestate we weren't using to any scale."

This closely follows a similar move by rival RealNetworks,which in December introduced a new version of the rhapsody.comsite that allows anyone to stream up to 25 songs per month forfree, without buying or subscribing.

SHARE AND SHARE ALIKE

Both services sell banner ads on their sites, as well as ontheir Web-based music players. Both also share the ad revenuewith labels and publishers in return for music licensingrights.

The result is yet another new source of income for a musicindustry desperate to recoup its losses from the continuingdecline of physical CD sales.

"It's a great model," Pali Research analyst RichardGreenfield says. "It just shows how there's more and more waysto make money off of music beyond the specific sale of it."

Subscription services pay labels and publishers aper-subscriber minimum each month, estimated to be about $6-$8per month. Now Napster and Rhapsody will include a percentageof their monthly ad revenue as well.

The amount of advertising revenue each label and publisherreceives will vary based on the number of times their artists'music is played each month, according to industry sources.

And each service pays a different amount. It is widelybelieved that Napster is paying the music industry a largersplit of its advertising revenue than RealNetworks, primarilybecause napster.com limits only the number of times anindividual song can be played whereas rhapsody.com limitsoverall usage to 25 songs per month.

"The more control you have over what the user can do andthe less that the user can do with (the service), the lower thesplit," says Chris Castle, a music industry lawyer specializingin digital music services.

PEAK PERIOD

These moves come at a time when Internet advertising is atan all-time high. According to the Interactive AdvertisingBureau, online advertising in the United States grew by 30percent last year to $12.5 billion. Forrester Researchestimates this figure will grow to $26 billion and representabout 8 percent of all advertising spending by 2010.

But the determining factor for marketers as to where theywill spend these dollars online is the same as that of anyother medium: how many people they can reach. By that measuringstick, Napster and Rhapsody have some catching up to do.

According to Nielsen NetRatings, rhapsody.com had 2.3million unique visitors in March, while napster.com had 1.9million. By way of comparison, iTunes received 20 millionunique visitors in March.

Piper Jaffray analyst Gene Munster estimates Napster's adrevenue will total about $50 million annually.

"It's not going to be Google revenue by any stretch interms of advertising," Gartner G2 analyst Mike McGuire says."But it's probably enough to help fund it and pay for thelicensing of the music. Now it's up to them to drive traffic."

The idea of music as a service that is "rented" over musicthat is owned and purchased has proved a tough sell. With anestimated customer acquisition cost of $100 per subscriber,Napster spent tens of millions on marketing alone just toconvince music fans to download its subscription software for afree trial. It currently has about 600,000 subscribers from theeffort.

The new model allows Napster and Rhapsody to offer anindefinite trial period while still collecting revenue andpaying labels for the ability to do so.

"We find it an interesting approach," EMI executive VP ofstrategy and business development Adam Klein says. "There's ahuge amount of evidence that shows consumers need to listen tostreams a certain number of times before they commit to buy.Consumers who spend more time experimenting with music end upspending more money buying music. We have to be progressive inour experimentation, understand where consumers are going andadjust our product accordingly."

Reuters/Billboard

http://us.rd.yahoo.com/