The Future of Online Music: Labels and Services Working Together

The icy relationship between major music labels and digital music services may be thawing, according to a recent article in the New York Times.

imeemImeem, a digital music service that lets people listen, share and discover music based on their tastes and friends’ recommendations, had 26 million people a month using their service and owed the labels millions of dollars, but their income from advertising was far from covering royalties. The rumor was that they were about to shut down. Instead, Warner forgave their debt and relaxed their licensing deals with Imeem, and Universal followed suit , relaxing rates as well. Imeem ended up raising more money from investors as a result of a more positive financial outlook.

It seems that the record labels were seeing the value of 26 million Imeem users. As part of the new relationship with the labels, Imeem will push users to purchase tshirts and concert tickets and will soon add a song download store similar to iTunes. Revenues from these sales will be shared with the labels.

“We are trying to figure out how to restructure partnerships and develop a healthier ecosystem where entrepreneurs can continue to innovate,” said Michael Nash, executive vice president for digital strategy at Warner Music. “Entrepreneurs are also realizing they need to spend as much energy on their business model as they do on technological innovation.”

Digital music services have struggled to create profitable business models. The labels have watched some online services fail, while others, such as MySpace Music, have returned disappointing results. This may have been the impetus behind the recent deal Warner gave to Imeem. It’s a fine line – the labels want to make money for music played by the services, but it’s been difficult to discern where reasonable costs begin.

One thing that seems to be helping is that services are working hard to create profitable business models. Pandora, one of the most popular streaming music services, recently announced that they would expand the number of audio commercials they run on their channels, and also offer a subscription based ad-free service. Pandora also sells display advertising, and lots of music downloads. They have publicly stated that they expect to cover costs and see profit by next year.

Online music services are perceived as a threat to hard copy music sales and therefore music labels want to be compensated for songs played. Copyright laws require rates to be negotiated between the two parties, which is where the problem has been – the labels have been demanding higher rates than the services can pay, wanting the music sites to develop more aggressive business models with multiple revenue streams. It makes sense for the labels to support services like Imeem and Pandora as explore routes to profitability. The future of digital music online depends on it.

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