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 Music-related social networking sites are shaking up the music business and could be the paradigm for the future. At first, Joy Walshe's riff sounds like that sorry refrain so common among musicians, however talented they may be. The London-based singer-songwriter doesn't have a record contract, had a busted deal with an independent label that ended up in court, scores gigs where and when she can and works in an office to get by financially.
Walshe, however, has emerged as an unlikely luminary in a significant new movement within the music business. In February and again in March, both her self-released album, "Saint for a Sinner," and one of its tracks, "Home," topped the charts of We7, one of many music-oriented social networks that have sprung up recently. Without leaving Britain, Walshe has garnered an international following and some extra income. "That's the beauty of social networks," says Steve Purdham, We7's CEO and one of its founders. "A piece of music can go around the world in 24 to 48 hours." Music fans aren't the only ones responding to these burgeoning networks. Mostly venture fund investors have piled tens of millions of dollars on at least a dozen sites similar to We7. Most notably, CBS Corp. paid $280 million last year for Last.fm, We7's older and much larger competitor. Even major record labels are placing bets on these sites. This month, Universal Music Group announced an investment in a network called Buzznet. Terms weren't disclosed. Warner Music Group, which in May 2007 had sued the music-related social network Imeem, ended up not only dropping its suit, but investing undisclosed amounts in Imeem, as well as in another social network, Lala.com. While these sites vary in approach, ease of use, interactivity and scope, they tend to mix elements of online radio and free, on-demand digital streaming of music with user chatter and peer recommendations. They have sprung up at a time when broad-based social networks are also increasingly relying on music to drive traffic and keep visitors occupied. Both Facebook and European favorite Bebo host some of these music sites. Social networks "are the next generation of broadcasters, the next MTV," says Gerd Leonhard, who has written and lectured extensively on the future of music and who co-founded one (apparently unsuccessful) music-centered social network. For even the broadest of social networks, "music is the key ingredient." The emergence of these networks comes at a time when recorded music's old industry model is on life support. What will take its place is the subject of endless debate, but the reality that the old ways are dying is self-evident. "Right now, we're witnessing a watershed moment," says Tim Westergren, the founder of music social network site Pandora. "There's not a part of the industry that is unscathed." Music-centric social networks represent one important response to recorded music's ever-more-desperate straits, even if these online sites themselves are less than orderly and often less than stable. They provide insight into the dislocation of the traditional music business while serving to accentuate that dislocation. "This is the Wild West as far as the music business goes," says Purdham, who raised some $10 million for We7, which launched in June. "We're ripping up the rule book." While some site developers say major labels are more receptive than a year ago, the industry isn't necessarily embracing the concept. Last week, Leonhard announced he would unplug on May 1 Sonific, his music-related social network. In a statement on the site, Leonhard rails against the labels, calling them "certifiably dysfunctional" and accusing them of making outrageous demands of "very large cash advances," "free equity" and imposing "utterly bizarre usage restrictions" in return for licenses. In these chaotic times, social networks provide a take on the issue of who owns the music. Instead of illegally swapping songs over the Internet or burning compact discs for friends, users of some of these music sites can legally listen to all the songs they want for free. But there's a catch. They can't keep them or freely download them on iPods and other MP3 players. How all this plays into the future of recorded music isn't clear. The fact is, say industry analysts, those under 25 no longer own CD collections and most have come to expect music to be free. At the same time, technology is close to realizing the dream of delivering digital music anywhere and anytime. Martin Stiksel, one of Last.fm's founders, says portable delivery of sites such as his is close at hand, whether they stream through iPod-like devices, mobile telephones or automobiles. He calls this phenomenon "a move to access rather than ownership." As we move to the point where listeners no longer need to physically own music to hear it on demand, the question remains: How will artists be paid, and how will recorded music survive? These services maintain they are part of the answer. They insist they pay royalties, although the structure of those payments remains the subject of grueling, sometimes emotional, negotiations. One example: Music rights are usually geography-specific, while the Internet is, by its very nature, universal. "One of the challenges of social networks is being able to deliver music in a legal way but one that's viable," says Purdham, a technologist who founded and took public an Internet security systems provider before plunging into digital delivery of music in early 2007. Adds Stiksel: "Before we ever streamed the first song, we wanted to do the right thing in an area where you don't always know what the right thing is." Services like theirs illustrate a peculiar and bedeviling kind of economics. While social-network executives talk of multiple revenue streams, led by advertising, it's hard to see how the sites can be profitable on their own. On the other hand, they may form a vital and necessary part of a new-media offering. So CBS may not recover its investment in Last.fm for years -- if ever. But it establishes CBS as a leader in online music delivery, which is an increasingly important component of online entertainment. That helps to explain one of its attractions for investors. Another motivator: Because the music industry is in such ferment, all sorts of efforts are afoot to, in the words of veteran manager Peter Jenner, "monetize the chaos." That means searching for indirect sources of revenue, from ticket sales to marketing tie-ups, from data mining to merchandising. "What looks like free music creates a huge amount of money," says Leonhard. Social networking sites differ. A few offer clips of certain songs and are more teasers than full-scale playlists. Others provide full songs based on listener profiles or the recommendations of those with similar taste. Say you're an eager listener of the 1970s rock group Yes. On services such as Last.fm or Pandora, you can set up your very own "Yes Radio" stations. They crank out not only Yes tunes, but also songs that, through human or computer means, stand a good chance of appealing to a Yes fan, in this case mostly other progressive rock acts. Some of these sites emphasize online "friends" and socializing, while others focus on the music itself. A five-month-old service called Jango offers lyrics, artists' biographies, videos, member comments and a mechanism to eavesdrop on what other members are listening to alongside the songs themselves. For a music junkie, it's a feast. "This does indeed change the way people listen to music," notes Stiksel. "Online radio allows people to take charge of their entertainment. They become their own DJs." With Last.fm, Pandora and Jango, it's possible to dial up a song of a particular artist and, sometimes, particular songs. No site approaches the notion of a celestial jukebox, which would provide millions of songs on demand. That is the purview of paid subscription services such as RealNetworks Inc.'s Rhapsody and publicly traded Napster Inc., the legitimate successor to the notorious music-sharing service that turned the industry upside down a few years ago. Rhapsody had only about 1.9 million subscribers as of March 31, while Napster reported 760,000. Napster continues to lose money, one sign that the service isn't exactly a runaway success. Another indication: Both AOL LLC and Yahoo! Inc. have jettisoned unsuccessful subscription services. AOL sold to Napster last year. Yahoo! announced in February it would migrate its users over the next several months to Rhapsody. The number of users of the music-related social networks, by contrast, is staggering. Based in London, Last.fm offers a master playlist of more than 5 million tracks and boasts of 21 million listeners each month. Almost 20 million visitors log into Imeem each month, according to online measurement service Quantcast Corp. Based in Oakland, Calif., Pandora has 12 million registered listeners. More than 3.4 million unique visitors spent time with Pandora last month, according to Nielsen Online. Pandora's catalog lists 450,000 artists, of whom 98% are played each day, says Westergren. "When we started, it was a paid service, $3 a month, and no one showed up," he adds. "We switched to free. Now we've got 12 million people using this." Then there's the granddaddy of social networks, MySpace.com, with 30 million monthly visitors. The division of News Corp. may fashion itself as broad-based, encompassing a galaxy of interests, but music is central to its appeal. MySpace.com hosts on its site more than 5 million separate musical acts (or what passes as music), which run from superstars to shower-stall divas. MySpace is the ultimate democratic musical showcase. Anyone can have a MySpace Web page and offer a few tracks to listeners. In the process, MySpace has produced the ultimate eclectic musical array. Groups range from the Preschool Tea Party Massacre to Polkaboy, from Lounge-O-Rama to the Lounge Lizards from Hell, and everyone in between. Early this month, MySpace announced a tie-in with three of the four major labels -- Sony BMG Music Entertainment, Universal and Warner -- to peddle music without copy protection, a direct challenge to Apple Inc.'s iTunes, whose songs carry software that restricts listening options. With this initiative, MySpace "is trying to move [music] from a marketing-PR function to a business concept," says Jennifer Simpson, an analyst with Yankee Group Research Inc. But this is still a paid-for download when even the longevity of the iTunes business is being questioned. "It may be a great deal for the [labels], but it's a lousy deal for consumers," says broadcast veteran Jerry Del Colliano, who now teaches music business at the University of Southern California and has a popular blog on music and new media. Record labels "can try to get 99 cents or whatever [for a track] out of people. But the value is zero." By contrast, music-oriented networks may offer paid downloads or links to CD sales but assume most tunes won't be sold. Instead, they rely on advertising, mostly banners, although We7 is testing audio ads. "The question is: How does a consumer pay for music? Money or time?" asks Purdham, whose co-investor in We7 is rock star Peter Gabriel. With today's audience, that kind of tradeoff should work well, advocates believe. Consumers "want free music but have a high tolerance for advertising," says Doug Perlson, CEO of TargetSpot Inc., an Internet advertising company that boasts CBS as an investor. Social networks are able to pinpoint demographics, geography and taste, says Perlson, greatly enhancing the efficiency and reach of a particular advertisement. To supporters, these services and their investments mark a smart bet on the confluence of available technology and consumer habits. "The barriers to entry for social networks are very, very low," says Mark Fischer, a new-media and entertainment lawyer at Fish & Richardson PC. "So lots of people are reaching in. There's a potential for very high rewards." These services, backers maintain, represent a successor to traditional radio. "It's an incredible means of music recommendation," says Larry Marcus, managing director of Walden Venture Capital, which has invested more than $10 million in Pandora, about half the total money the site has raised. "It's about rediscovering the joy of musical discovery." Marcus believes Pandora will "ultimately be like a radio-style business model." Others, though, question commercial viability. "I don't see them as a long-term solution," says Simpson, who believes music-oriented networks are primarily for "new band junkies. The business mechanisms have not been figured out." Some critics wonder whether these sites are just an interim step in the evolution of musical delivery. They point to the next generation of mobile telephones, which should be able to act as radio and iPod, as the real heart stopper. Even those in the industry assume many current music sites will become part of larger new-media networks, consolidate or fail. Sonific appears to be one early victim. "Some models will be redundant before they get off the ground," warns Purdham. In January, Imeem acquired Internet radio service Anywhere.FM. Two months later, it bought Snocap Inc., a digital content tracking company founded by the originator of Napster. Terms of both acquisitions weren't disclosed. Even some of those who see value in these networks question just how much they're worth. Witness the skepticism that greeted CBS' acquisition of Last.fm. "An overvaluation," believes Kelli Richards, president of the digital media consultancy All Access Group. She warns that investors may be disappointed by just how much revenue these sites can generate and compares the rich multiples to the kind of irrational exuberance that valued Facebook at $15 billion. "It's too early in the game to say definitely what kind of cash flow, what kind of potential these companies are going to have," concludes Perlson. What's more obvious is the continued decline of recorded music, which wallows in a major label-led funk. CD sales in the U.S. fell almost 11% in the first quarter of 2008, according to Nielsen SoundScan, after a 15% drop last year. Since 2000, the market has declined almost 40%. While digital sales grow rapidly, they made up only 15% of the $19.3 billion recorded music revenue, according to the International Federation of Phonographic Industry. No one is sure where the industry is headed or how it's getting there, although nearly everyone outside the labels has written them off as the guiding force. "Their existing business is just vanishing," says Westergren. "The question for me is how long it will take and how bloody it will be." A reliance on superhits to fuel the bottom line no longer works, but major labels have been able to offer no real alternative. Instead, they've spent the better part of a decade in a futile effort to protect their turf, suing teenagers for illegal downloads rather than crafting, say, new delivery systems. Those in the industry say some executives guiding the majors finally understand the need to change. "When I first came into the industry in January '07, everything [from the majors] was 'no,' " says Purdham. "Twelve months later, although the execution is not there, there's been a sea change in the industry. There's a willingness to talk." As Ali Partovi, CEO of music-oriented social network site iLike, told a digital music conference in February: "Eight months ago, I was sued by Warner. Now we're working hand in hand." But the Sonific experience doesn't bode well. A late conversion to digital delivery by the majors often comes across as halfhearted. It could well be a matter of too little, too late. At EMI Group Ltd., for example, bedrock artists such as Paul McCartney, Radiohead, the Rolling Stones and Coldplay have either bolted or threatened to leave. The £3.2 billion ($6.4 billion) that private equity group Terra Firma Capital Partners Ltd. paid for EMI last year now seems a monumental blunder. Rival Warner's stock has plummeted to a quarter of what it was three years ago. Last October, Warner lost superstar Madonna, who signed a $120 million recording-touring-merchandising deal with major tour promoter Live Nation Inc. While some musical superstars now migrate from major labels to everything from Starbucks to their own Web sites for distribution, traditional music giants face an even more fundamental problem: the commoditization of the recorded song. "Copying a song is free to do and free to get," Leonhard says. "And you can't build a business on the basis of a copy." Music, adds Perlson, "is still a profitable industry; it just doesn't look the same." Live music has never been healthier; witness everything from sold-out festivals to last summer's blockbuster tour by The Police. "In the past, labels would find an act and write a large check, based on the promise of records sold," says Jango founder Dan Kaufman. "But now, U2 can make $380 million on tour and sell few records, the Rolling Stones can make $580 million on tour and sell no records. The way artists make money has changed." Technology has empowered thousands of artists to professionally create, distribute and market their own music. They keep a far larger percentage of what they sell than if they were tethered to one of the major labels. Just as importantly, they use their recorded music to promote their live music, their merchandise, ringtones and other revenue streams, rather than depend on CD sales for their livelihood. "It's not a devaluation of music, it's just a revaluation," says Ted Cohen, a record industry veteran who now heads digital media consultancy TAG Strategic LLC. "It's not about music as a product; it's about music as a service." Music-oriented social networks promote this kind of ecosystem. Not only can they keep fans abreast of a favorite artist's music, but the latest performance dates and gossip. Last.fm will not only recommend a concert, but inform users who else is attending the event. This kind of new economics has benefited many musicians, creating what artists' manager Panos Panay calls "an artistic middle class." "Pre-Internet days looked like pre-revolutionary France. The system was set up to back up the aristocracy and serviced this top 2%" of musical artists, argues Panay, the founder and CEO of Sonicbids Corp., an online booking service for musicians. "The Internet was the digital equivalent of the French Revolution. ... Domination of the [music] industry by the middle class is like a society dominated by the middle class. It will be a much more robust industry." Panay adds, "We confuse the record business with the music business." The recorded music business will continue to exist, "but it will shrink in importance. It will shrink in aggregate value." Radio itself is undergoing seismic changes. The likes of Last.fm and Pandora represent a reaction to the traditional medium. Call it Clear Channeling. Led by Clear Channel Communications Inc., which owns more than 1,200 radio stations, the business has consolidated to a degree unimaginable a decade ago. In the process, commercial radio exhibits a remarkable homogeneity of approach and an ever-shrinking playlist. Fischer calls this a "collapse of the infrastructure" for providing music to listeners. Commercial radio has ceded both its traditional role of musical gatekeeper and the promotion of new artists to the Internet. Online radio can target audiences to a degree unthinkable in traditional media. Social-network sites bring this several steps further, tailoring musical mixes to individual listeners. In the jargon of the day, we're moving from broadcasting to unicasting. This gives listeners the chance to hear what they want, and explore and discover new music. For teenagers and young adults, a generation nurtured on computers, cell phones and iPods, commercial radio is pretty irrelevant. Del Colliano describes quizzing a class of 35 about their habits. Less than 10% listen to radio, he says, while 75% use Pandora. "They consider Tim Westergren a god," he says. The social dimension of recorded music is easy enough to understand, Del Colliano continues. For this generation, trading music, recommending a band, debating an artist, commenting (online, of course) on a tune is an essential social lubricant. That's where these networks shine, whether it involves ranting over a new release or raving about an obscure group. A 17-year-old musician might regularly track Last.fm to see what others listen to compared with his own listening habits. "It's very much like the old days in a coffee shop swapping vinyl," Leonhard explains. "People care more about the opinions of others. They're tired of [traditional media's] one-way culture. They want interaction." Musicians feel the same. "People are really into finding new artists and not being spoon-fed by the majors," says Walshe, whose We7 popularity translates, she says, into free publicity and bigger audiences for her performances. And the economic benefits? Walshe gets five pence every time a song of hers is downloaded -- for free -- on We7. In March, that worked out to £400, she says, which she's plowing back into promotion. "It's a validation that people are enjoying my music," she says. "That's more important than 5 p a song." --Matt Miller See full issue of the 4.28 newsweekly Categories Deal Video
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