The d-future is now with MySpace Music

Major labels have reassessed approach to Internet

DENVER -- As the dust settles from Thursday's launch of MySpace's highly anticipated and somewhat controversial new music service, the broader implications of the initiative are becoming clearer.

A joint venture of the News Corp. subsidiary and Universal Music Group, Sony BMG Music Entertainment, Warner Music Group, EMI Music and Sony/ATV Music Publishing, MySpace Music Service represents a turning point for the recording industry and MySpace itself.

For the major labels, MySpace Music is the cumulation of more than 18 months of experimentation in new business models and a launching pad for their digital music strategies for the future. While detractors continue to level criticisms against them for their alleged role in hindering the digital music market with complicated licensing demands and other limitations, the majors have largely reassessed their approach to the Internet, spurred by the continued slide in physical music sales.

During the year and a half leading up to the launch, the majors have signed unprecedented deals opening the door to ad-supported free streaming, digital rights management-free music sales and reduced licensing costs in return for revenue share and/or company equity.

All these elements are present in the MySpace Music deal. As such, the service represents less of an experiment and more of a template for future agreements.

"It highlights the shift in our business to bring business models to the market that meet where the demand is for our music," UMG's eLabs division executive vp Rio Caraeff said. "It's the single largest thing we've done to change the way we do business around the way the customer wants to experience music."

Caraeff says to expect further flexibility in digital music deals in the near future. Among other things, this means including access to the Universal catalog in software development kits that give developers the ability to create new applications with built-in music licensing.

"You'll see more from us going forward in this area," he said. "The notion of creating and enabling more innovation around music than would normally occur under our prior modes of doing business is very important to us. We recognize that the ways we can think of music are not the only ways music can be used online. We would like to see tens of thousands of instances of music being used in creative ways in interesting apps online with less friction and less hassle."

For MySpace, the service represents a significant expansion from a simple social networking site billed as "a place for friends" to a content-driven service billed as "a place for music," using its core community features as its foundation.

"The whole consumption patterns for both music and video have changed a great deal in the last five years," MySpace co-founder and CEO Chris DeWolfe said. "We wanted to put together a music service consistent with those changing patterns and layer a business model around it."

The social networking giant has long served two masters -- the artists with profiles on the service and the music fans with the same. There are more than 5 million bands with MySpace profiles, and while MySpace doesn't provide a specific breakdown, the vast majority are independent or unsigned artists.

And MySpace's first foray into digital music sales was very much an indie-led effort. The company two years ago partnered with digital registry firm Snocap to add a DRM-free "MyStores" sales widget to artist profiles. Despite signing content deals with individual artists and larger indie aggregators like Independent Online Distribution Alliance and the Orchard, sales from the initiative proved disappointing. Rival imeem now owns Snocap, which still offers the MyStores service.

But in launching a music service meant in part to take on Apple's iTunes store, particularly one aspiring to generate advertising revenue based on free music streams and traffic to artist pages, MySpace has opted to focus on the content its members use most.

That means major labels. And while major-label acts represent the minority of artists on MySpace, they account for the majority of content the company's broader membership seeks out, in terms of music streamed and artist profiles visited, although MySpace doesn't provide specific figures.

Not surprisingly, independent labels and the digital aggregators that represent them are somewhat miffed that they weren't invited to take part in the joint venture alongside their major-label competitors. However, that didn't stop the Orchard and major-owned indie distributors (Warner's Alternative Distribution Alliance, Sony's RED, Universal's Fontana and EMI's Caroline) from licensing the catalog of their label clients to the service at launch. Negotiations between MySpace and other indie labels remain ongoing. While an equity stake in the joint venture is completely off the table, the terms under discussion focus on the indies' share of ad revenue from streaming and purchased music and videos.

The majors in the joint venture, meanwhile, will profit not only from a cut of the same ad and sales revenue, but also in the underlying revenue the venture receives, even from content contributed by other labels.

Charles Caldas, CEO of indie music licensing group Merlin, criticized this arrangement, arguing that it allows major labels to profit from the use of indie music at MySpace Music without giving indies the ability to profit from the venture as equity partners.

"Without an equitable participation by independents, that creates a situation that is both unhealthy and dangerous," Caldas says, acknowledging that Merlin is nonetheless in licensing talks with MySpace Music.

By contrast, Orchard CEO Greg Scholl downplayed the immediate importance of securing an equity stake in MySpace Music.

"The opportunity to create an ancillary and noncannibalistic revenue stream and ignite growth in the sector is, on balance, more important to our clients than holding out for an equity stake of uncertain future value that will likely never come to pass," Scholl says. "So [we] chose proactive engagement. ... We will continue to press our case for equity or profit sharing for the independent sector, but in the meantime, (we will) ensure our clients prosper from the value MySpace Music creates."

Time will tell whether this new major-label focus will have better results. But for better or for worse, neither MySpace nor the majors plan to do things the old way anymore.