Will Music Click with MySpace Users?

MySpace parent News Corp. will offer free music from the four major labels in a full-court press to generate ad revenue

The music industry is looking for its next act. And MySpace, News Corp.'s (NWS) social network, intends to provide it. On Sept. 25, the giant social network is finally unveiling its long-anticipated (and hardly secret) MySpace Music site, which will be the music industry's largest attempt to date to generate advertising revenue in exchange for free online music.

The idea is simple: Offer every shred of music out there, including new releases and most of the catalogs of the four major labels—Universal Music Group, Sony BMG Music Entertainment, Warner Music Group (WMG), and EMI. It could be a marriage made in heaven. With 120 million global users and 35 million unique users each month, MySpace has what the music industry badly needs—the attention of the young, hip demographic advertisers most crave. What's more, these users love music; about two-thirds have streamed songs to their pages, MySpace says.

But can MySpace get these socialites to stick around long enough to make money for a music industry eager to cash in on digital music sales? MySpace Music, demonstrated in recent days to reporters, is a sleek service that offers wall-to-wall music, an impressive search engine (just type in the title or artist), and a player that lets users personalize dozens of playlists with as many as 100 songs apiece. MySpace users can browse other folks' lists, and get pop-up alerts from the artists whose songs are being played. Best of all, the music is free.

Equity for Music Labels

To get the labels to buy in, MySpace gave each an equity stake in the joint venture. The labels also get a cut of revenues from ads that sit on the page or player. MySpace won't say how large a slice, but reports indicate it could be 60%.

People who want to play the music elsewhere are sent from MySpace to Amazon (AMZN), which sells songs that can be played on an iPod or other digital music device—in contrast to music purchased from Apple's (AAPL) iTunes Music Store, which places limits on where it can be played. Amazon also sells songs for 89¢, a dime less than on iTunes. MySpace also hooks users to Jamster, where they can buy ringtones.

MySpace executives say down the road, they also intend to sell concert tickets and artists' merchandise. "We're not sure how big this will be, but it's exactly where we need to be," says Rio Caraeff, digital executive vice-president at Universal Music, the industry leader. "We need to diversify our sales away from just physical sales, and that means selling music any place a consumer wants to get it," he says.

Ringtone Growth Slowing

So far this year, Universal gets roughly 21% of its music sales from digital outlets, according to financial statements from parent company Vivendi Universal. Most of that comes from ringtones, says Caraeff, but growth there is slowing. He figures digital sales could be as much as 50% next year, but will need some help from new sources, including MySpace.

Like most of the music industry, Universal has been positioning itself to take advantage of online sites like MySpace Music that connect the consumer directly to the artist, says Caraeff. Last year, the label bought Sanctuary, a management company that markets merchandise for acts like The Who and represents artists like Elton John and Amy Winehouse (both Universal acts). It also provides applications that let consumers and others put Universal music—and ads sold by Universal—on their own sites. And with a market share of 35.2% of all music sold this year, Universal stands to be the largest beneficiary of a service like MySpace Music that direct consumers to Amazon.

MySpace has set up huge displays in New York's Time Square and on the Sunset Strip in Los Angeles. It's surely a matter of time before MySpace Music finds its way into other Fox outlets, perhaps getting promotional time on Sunday morning NFL games or an appearance on Fox Broadcasting's show 24. Whatever the method for building buzz, music execs who have long been desperate for a new way to sell music to fans are eager for the next act to begin.

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