Can MySpace Save the Major Music Labels?

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The idea behind MySpace Music is that it can help generate revenue for artists every day, not just around an album's release. The venture gives the labels access to MySpace's global audience of 118 million users and its ad sales team of more than 250 people. It also provides the labels with a prominent venue to pull in audiences and advertisers with new types of nonmusic content, including music news, behind-the-scenes videos, and artist interviews such as the one with T.I.

Major advertisers are signing up. Industry sources say MySpace Music has signed multimillion-dollar ad deals with McDonald's (MCD), Toyota Motor (TM), and other major brands for its launch. Toyota and McDonald's confirmed their participation, although they wouldn't specify the ad dollars involved. Kim McCullough, Toyota's manager of marketing communications, calls the MySpace Music launch an "unprecedented opportunity."

MySpace is designed to do more than bring in ad revenue, though. It also gives the industry a new channel through which to sell songs, ringtones, T-shirts, and tickets. With 5 million artists using the site to promote their bands, MySpace has already become a major destination for discovering new music and upcoming concerts.

Model Venture?

MySpace Music can't save the industry on its own. The whole site takes in about $743 million in advertising revenue now. Make some reasonably optimistic projections about MySpace's prospects, and the record labels could end up with $1 billion in new revenue from the venture by 2012. That helps, but given the current rate of decline in CD sales, the industry could lose an additional $3 billion in yearly CD sales by that time.

Still, MySpace Music may prove to be a model for future ventures on the Net. If the concept works, it could help the labels turn other online hangouts, like the leading social networking site, Facebook, into forums for music sales and related revenues. It could also help demonstrate that the labels will see tangible benefits from new contracts under which they share in advertising, e-commerce, and merchandise sales. "If they do all that, then maybe they can stem the tide of these rapidly falling CD sales and start to see the pie get a little bigger," says Paul Verna, a senior analyst at eMarketer. "But it is definitely a big if."

The labels are experimenting with a host of new efforts beyond MySpace. One recent deal with Nokia (NOK) will let the Finnish mobile-phone maker, through its Comes With Music program, sell phones preloaded with music subscriptions. A separate deal with imeem, a Web site designed to help people discover new music, provides the labels with licensing fees and a slice of advertising revenues. "There is a larger degree of sophistication at the labels and a willingness to embrace more cool stuff," says Dalton Caldwell, imeem's chief executive.

Lack of Innovation

The labels are intent on reinvigorating music sales on the Net. Digital sales growth slowed from 74% in 2006 to 43% last year. Record executives believe that, as Apple (AAPL) has come to dominate online sales through its iTunes store, sales growth has been hurt by a lack of innovation. "I think everyone has a sober understanding that the next three years will be challenging," says Mitch Bainwol. chief executive of the RIAA. "But the long-term prognosis is outstanding."

Not everyone likes the labels' latest approach. Under new contracts, bands are being asked to give labels a cut of revenues from concert tickets and merchandise sales, instead of just from music sales. Jason Debiak, keyboardist with the band New London Fire, thinks that's a bad deal for musicians, unless the labels are going to pay for singing lessons or other development. "It's an offer that should be thrown in the garbage," he says.

Still, the major labels have made a sharp reversal that may improve their prospects. For years they fought Internet companies for fear that their music would be stolen. Now they're racing to capitalize on the new opportunities on the Web. Warner has created a special digital studio to help artists develop unique online content. And Warner artists T.I. and Grammy Award-winning rapper Missy Elliott have album releases timed to coincide with the MySpace Music launch. "The labels were very reticent to embrace change at a time when it could have actually worked to their advantage," says eMarketer's Verna. "Now there's a sense that they have no choice."

Business Exchange related topics:
MySpace
Social Networking
Music Industry
Music Piracy

With Tom Lowry in New York. Holahan is a writer for BusinessWeek.com in New York.