There's a new music revolution brewing, and it's social.
Social music sites Imeem and Last.fm — which offer on-demand, ad-supported free music — have grown rapidly to 20 million monthly users each. Their success has the music industry seriously exploring the viability of ad-supported, free music as the next big business model for online music.
"This is driven by the reality of the way the Web is working now, and the amount of advertising dollars moving to the Internet," says Rio Caraeff, executive vice president of eLabs, Universal Music's digital arm. "This is about going where the money is and where the fans are, and giving customers what they want, which is free music."
In the wake of declining CD sales, the music industry has struggled with new ways to market music online. Apple's iTunes store is one powerhouse, with over 4 billion songs sold since 2001. But the industry has had little success trying to incubate alternatives, such as monthly subscriptions for on-demand music. Just this week, Yahoo announced it would close its subscription music service and migrate its customers to Rhapsody.
Last week, start-up Qtrax threw a splashy launch party at a European trade show for a free, ad-supported music-download service. It fizzled after the major labels said it had no signed deals. Another start-up, Spiral Frog, offers free, ad-supported downloads, but only one major label, Universal, has signed on.
The latest trend is ad-supported, on-demand online music streaming, most notably, Imeem and Last.fm.
The old negative for such Web-only services — that you can listen to a song, but can't download it — no longer appears to be an issue. In the age of always-on, high-speed connections, "Who cares?" says Quincy Smith, president of CBS Interactive, which bought Last.fm for $280 million in 2007.
Imeem and Last.fm are positioned as music communities, where friends tell each other about what songs and artists they like. Since the sites have licensing agreements with the four major labels, fans can share songs and playlists with each other. Last.fm restricts users to listening to a song just three times, while Imeem has no restrictions.
Both services are online radio stations, but they are different from competitors Pandora or Slacker, which create personalized stations based on your musical tastes. Here, you pick the songs and the artists, or choose music based on recommendations from peers.
"Friends pay a lot more attention to what their peers say than music reviewers," says Mike McGuire, an analyst with Gartner.
The sites also differ from social networks like MySpace and Facebook in that "our audience isn't looking for dates," says Steve Jang, Imeem's chief marketing officer.
Still hope for subscriptions?
Music industry executives and analysts believe the social sites could even help subscription services, providing the boost they need to win consumer acceptance.
"You introduce them to free music (on the social sites), and let them know they could pay a monthly fee and get no ads, portability and higher fidelity," says Caraeff at eLabs. "This could be a real shot in the arm for subscriptions."
Imeem and Last.fm have attracted millions of fans, while fee-based services have struggled. Rhapsody has fewer than 1 million subscribers, and Yahoo had fewer than 400,000 for its Music Unlimited, according to analyst Phil Leigh at Inside Digital Media.
But such services — including Rhapsody, Napster and Microsoft's Zune Marketplace — are easier to navigate. At the free sites, songs are available on-demand — but that's about it. "You can't find the entire album, unless you're lucky," says David Card, an analyst with JupiterResearch. "It's more of a hit and miss."
Last.fm says it will launch a subscription service later this year.
While ad-supported on-demand online music is clearly striking a chord, the category is so new that few analysts have factored in its growth. For now, JupiterResearch projects a $3.5 billion digital music industry by 2012, from nearly $2 billion in 2008.
Card expects CD sales to decline to about $10 billion by 2012, from $12 billion for 2008.
"Digital isn't saving the industry yet," he says. "Maybe ad-supported music will do it, but we'll have to see."