The future of free vs. ad-supported music services

Valerie | 01 Apr 2009, 11:36

The demise of two popular Web 2.0 music services over recent weeks has called into question the future of the ad-supported business model.

The FT reports that SpiralFrog closed down on March 19 after borrowing millions from private investors, while Ruckus, another free service aimed at college students, folded in February. SpiralFrog’s business model was entirely supported by advertising, offering free and legal music and video downloads although songs could not be transferred onto storage or portable devices.

According to CNET, although ad-supported music sites have been around for two years, none have turned around any profit or matched the traffic achieved by iTunes. Blame has been cast on the record labels for demanding advance royalties or investment stakes -take the example of YouTube, which had to stop showing music videos in the UK because of demands that it should pay royalties each time a song was played being “simply prohibitive”. Meanwhile a Telegraph blog argues that these companies failed not because of “tumbling advertising revenues” but simply because they never generated the level of consumer interest needed to sustain them. 

The value of the free music business model has been much debated, particularly in regards to the right of artists to protect their IP, and the demise of these companies comes at a time when the music industry is questioning whether ad-supported sites help to boost music sales or are actually threatening to replace them.

Spotify, another free music streaming service announced a deal this week to sell MP3 downloads via the web-based music store 7digital, positioned in the media as a direct assault on the dominance of Apple’s iTunes Music Store, the UK’s biggest music retailer. Users have the choice of listening to music interlaced with adverts for free or paying a subscription to listen to tracks that are ad-free.

Mark Mulligan an analyst at Forrester Research observes:

“Spotify went into this thinking it was going to be a premium subscription business. The problem is what’s proven to be the successful part is the free bit”.

Echoing this view, is Ged Day, the founder of early download site Bleep.com:

“The market leader isn’t iTunes. The market leader is free”.

What is becoming apparent is that Web 2.0 is entering a transformative period in which business models will be re-evaluated and adapted so perhaps it is still too early to say whether recent events signal the death of the ad-supported model.