Making free music pay off
As MySpace prepares to launch its free music service, it faces an entrenched upstart playing the same tune.
(Fortune) -- It's been the talk of the music industry for months. Perhaps as soon as September, MySpace, the huge social networking site with 120 million users, will unveil an ad-supported music service with free songs from three of the four major record labels: Universal, Sony (SNE) and Warner Music (WMG). MySpace CEO Chris DeWolfe has promised it will launch "a new chapter in the story of modern music."
There's only one problem with his grandiose prediction: Imeem, an ad-supported social network based in San Francisco, already allows its members to listen to the same songs - and many more - for free. Imeem, with 27 million users, has secured deals with all four big music companies, including EMI, MySpace's missing major. And it has no interest at all in being eclipsed by its larger, News Corp (NWS, Fortune 500).-owned rival. "We're number one in social music," says Imeem founder and CEO Dalton Caldwell. "We like that."
MySpace declined to make executives available for interviews.
The ad-supported music business is tough. The major labels control 86% of all album sales in the United States, according to Nielsen SoundScan. They generally want to be paid about a penny each time someone listens to one of their songs at a website like Imeem.
That would make it hard for Imeem to make much money. Social networks don't command premium ad rates, largely because advertisers worry about having their messages possibly appearing alongside user-generated cat videos and less savory fare.
People on Madison Avenue say Imeem is getting about $4 in ad revenue for every thousand page views. If the company is paying a penny to SonyBMG every time someone listens to a Bruce Springsteen song, it's in trouble. After all, users probably listen to at least one song when they visit someone else's page on Imeem. Your typical Springsteen fan probably listens to many more if he winds up on the page of another fan of the Boss.
MySpace Music starts out in an even weaker position. Ad agency people say it charges about $1 less per thousand page views than Imeem. But Donnie Williams, director of digital strategy at marketing firm Horizon Media, says that MySpace is improving its ad-targeting abilities. "That means they'll be able to sell more ads," he says. "And it makes it harder for the Imeems of the world to maintain their rates." MySpace, it should be noted, also plans to make money by operating a music download store and a music subscription service.
Imeem executives decline to reveal their company's ad prices. Nor are they interested in shedding much light on the financial terms of their deals with record labels - except to say they are "ad revenue-sharing" arrangements rather than the standard penny-a-song contracts.
Caldwell says Imeem has yet to turn a profit. But he argues that his company is in a strong position because it is smaller and more innovative than MySpace.
Well, that's what every technology industry underdog says, isn't it? But in this case, there's some truth to it. Imeem employs a bunch of geeks who worked on the original incarnation of Napster. They have developed technology enabling its users to export their Imeem music and video playlists as widgets to other social networks like Facebook and, yes, MySpace, too.
Gene Munster, senior research analyst at Piper Jaffrey, says the widgets are part of the reason Imeem isn't about to be blown away by its bigger competitor. "MySpace is limited to people who use MySpace, whereas these widgets can be used on any platform. So they have access to a broader audience. We are also starting to see ads within those widgets."
That must set some people's teeth on edge at MySpace. Wouldn't you be a little miffed if your competitor was selling ads on your own website?
As you might expect, MySpace is watching its rival closely. Erin Pennington, national senior vice president of digital marketing firm Moxie Interactive, has run ads for Puma and Verizon (VZ, Fortune 500) on Imeem. She also patronizes MySpace. She gets a lot of Imeem queries when she visits MySpace's offices. "I definitely think MySpace has been paying attention to what they are doing," she says. "They are trying to learn from Imeem's success."
Here's something to think about. What if MySpace decides Imeem is too much of a distraction? Could it persuade its music company partners to dump the smaller social network? After all, MySpace Music will be a joint venture with SonyBMG, Universal and Warner Music. The music guys have a lot at stake here.
But as usual, their loyalties are divided. Warner Music is also an investor in Imeem along with Sequoia Capital and Morgenthaler Ventures. Warner sounds happy about the way things are going at Imeem. In May, Warner Music CEO Edgar Bronfman Jr. told investor he had "a lot of faith" in the company: "Our original investment is worth a great deal more than [what] we paid for our original investment."