Music Downloading's New Deal

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But going legit isn't easy for sites that once fostered illegal downloading. The music industry doesn't exactly want to embrace former foes, especially when there are sites such as SpiralFrog, which also plans an ad-supported business model—but doesn't have a history of sparring with the recording industry (see BusinessWeek.com, 9/5/06 "Meet the iTunes Wannabes"). Pirate sites that have experimented with other models after being sued by the RIAA have largely failed to be profitable. Napster (NAPS), which became a subscription service, is still losing money (see BusinessWeek.com, 8/3/06, "Napster on the Block?").

Industry Advantages

Brilliant Technologies CEO Allan Klepfisz says he voluntarily shut down the original Qtrax after four months, without any threat of suit, because he didn't want to sour a relationship with the industry he would eventually need as a partner. "We wanted to close it down and build a more legitimate model," he says. Qtrax is set to relaunch as an ad-supported model in January and now has licensing deals with most major labels, says Klepfisz.

Licensing is only half the battle. The next step is to convince users accustomed to free peer-to-peer networks to bother to come to sites that work in the same manner but want to deliver advertising or pitches to buy the song for 99 cents. SpiralFrog CEO Robin Kent believes users will gladly pay with their time and sift through some advertising for a guarantee that the file they are downloading is the real McCoy. "They don't mind advertising. They have grown up with advertising all their lives," says Kent.

Besides, users on peer-to-peer networks are already wasting a lot of time weeding out corrupt files on their favorite sites. Firms such as Artistdirect are hired by labels and movie studios to post dummy files and advertising on peer-to-peer networks in the guise of illegal downloads. When a user searches for an Artistdirect client's material, they are swamped with fake files that, after waiting to download, either don't do anything or deliver an advertiser-supported message with the artists or song involved. For example, in June, Artistdirect released a Jay-Z video supported by Coca-Cola (KO). The company is currently using decoying and redirecting measures with 20,000 popular music and movie titles.

Future Advertising

Qtrax's Klepfisz is not only confident users will come to free sites—he believes ad-supported models will become the dominant method of delivering music. After all, most online content, including news and video, is available for free, thanks to advertiser support. Much TV programming has been advertiser-supported for its entire existence. "It seems to us that it might be difficult for the music industry to carve itself out as the one area that isn't advertiser-supported," says Klepfisz. "We see ourselves as a very essential bridge between paying for music and a future when music is advertiser-supported."

Klepfisz's future may not be that implausible considering that pay-per-download sites have largely failed to be profitable (see BusinessWeek.com, 11/21/05, "Online Music's Elusive Bottom Line"). Even Apple only sells about 15 songs a year per iPod, on average. Meanwhile, American consumers are listening to more music than ever before, according to Jupiter Research's Mark Mulligan. "They have access to more music than any generation before, but they are spending less," says Mulligan.

The peer-to-peer sites are clearly part of the reason. If the record companies can't beat them out of existence, it makes sense to try joining them and collect whatever compensation they can get from advertisers. BigChampagne's Garland says the peer-to-peer model may even become profitable through a subscription service, providing the legitimate versions have the same enormity of selection available on the LimeWires of the world. "I think it is very clear that the draw for tens of millions of people is the social-networking aspect of this and, beyond that, the exhaustive, unlimited title availability. If you can dream of it, it is somewhere out there in somebody's collection."

Holahan is a writer for BusinessWeek.com in New York.