Free Music At a Price - Company Business and Marketing

Industry Standard, The, Sept 18, 2000 by Hane C. Lee

PlayJ has found one solution to "the Napster problem" -- advertising.

AS THE BATTLE OVER ONLINE MUSIC comes to a boil, a slew of companies has sprung up claiming to have the answer to "the Napster problem" -- the trouble that arises when a file-swapping service ignores copyright concerns. The question is how to go about solving that problem.

New York-based software company EverAd is championing PlayJ, its proprietary music format that embeds advertisements in each file -- the latest business model to hit online music. Dubbed "feels free," it works like this: Instead of charging consumers for music downloads, PlayJ formats its songs to launch a half-size banner window automatically on the listener's desktop; that window showcases a rotating series of ads for as long as the music plays. (The company encrypts PlayJ files to prevent them from being burned onto a CD or copied to a portable player.) Ad revenues are split evenly between EverAd, the record label and the Web site affiliate that distributes the download.

EverAd's solution does not end with music. The company has launched similar products for software and games, and plans to get into the e-books market within a month.

While the feels-free model is gaining steam, it faces a host of challenges, both practical and philosophical. Meanwhile, more established players like MP3.com and EMusic.com are touting "all you can eat" subscription offerings as the wave of the future. A smattering of other models -- like incentive programs, virtual tip jars and limited-time promotions -- is also finding supporters.

PlayJ, meanwhile, is busy building its business. EverAd CEO Angela Pumo says there have been nearly 2 million downloads of either the PlayJ player or plug-in, which works with most major MP3 players, including RealPlayer, Windows Media Player, Winamp and Sonique. The company has struck partnerships with music sites such as Listen.com and Launch.com to promote and distribute PlayJ files. And the content deals are rolling in. In addition to dozens of lesser-known indie labels, EverAd's PlayJ division last week announced it would distribute music from Artemis Records, the label run by former Mercury Records CEO Danny Goldberg and home to such artists as Rickie Lee Jones, Steve Earl and Kittie. Also last week, hip-hop frontman Wyclef Jean released an exclusive single in the PlayJ format, with a portion of revenues going to charity.

Advertisers, which include Guess, Banana Republic and Oracle, pay anywhere from $30 to $50 per 1,000 ad impressions, according to Pumo -- a good 20 percent higher than the going rates for more general-interest sites like the New York Times' Web site. What's especially appealing to advertisers, she contends, is that listeners can't close or hide the ad window while a PlayJ file is playing. In other words, advertisers are guaranteed a captive audience.

Pumo shrugs off concerns that the same feature could turn off consumers. "If it's a choice of free vs. paying, the consumer would rather put up with advertising," she says, adding, "It's one banner, not 10 on a homepage."

In fact, consumers are already used to the idea, says Karl Slatoff, VP of new media for Big Five label BMG. He compares the PlayJ model to using a popular song in a TV commercial, though with the former you get ads with your music and in the latter you get music with your ads. "It's the same concept -- using music to sell products," he says, noting that it's long been a supplemental revenue source for the major labels. But a business can't totally rely on someone else's advertising budget, he warns. (To wit, Internet bellwether Yahoo's dependence on ad revenues is scaring off investors, who have driven the stock down more than 15 percent in recent weeks.) Secondly, Slatoff says, many artists are reluctant to be associated with ads. And third, advertisers tend to be interested only in hit songs or established acts, which is a problem when it comes to new artists.

Perhaps most salient, though, is the major labels' vehement objection to the concept that music should be free. "It's difficult to do business with [companies like EverAd] because there's a fundamental disconnect in our philosophy," Slatoff says.

More palatable to the Big Five is the subscription model. Universal and Sony announced in early May that they would collaborate on a subscription-based joint venture, though so far the project has yet to materialize beyond the press release. MP3.com sells monthly subscriptions to classical, electronic, hip-hop and other genre channels for $9.99 a month or less, and also enables individual artists to sell their own subscriptions from the site. EMusic, pioneer of the pay-per-download model, recently introduced a subscription model in which consumers pay about $20 for a month, $45 for three months or $120 for a year of unlimited downloads from its library of licensed music.

EMusic CEO Gene Hoffman won't disclose how many subscribers his service has, but notes that 40 percent of them have committed to a full year. Hoffman says that subscribers generally download as many as 60 tracks on the first day they join, but that number quickly drops off to five downloads or fewer a day.