MySpace To Take A Bite Out Of Apple, Sell Music Online

Bands will be able to set their own prices when store opens in fall.

Here's the thing about being the king of the mountain: It offers a great view for a while, but any time you look down, there's bound to be someone coming to try to knock you down. Just ask Tom Cruise. Or Apple.

The computer company, which has been the digital-music king for more than five years thanks to its iPods and market-leading iTunes store, will face what could be its biggest competition yet later this year when MySpace launches its own download service.

The number one social-networking site, which claims more than 100 million registered members, announced Friday that it would begin selling downloads through a partnership with Snocap, a technology company started by Napster creator Shawn Fanning. According to MySpace CEO Chris DeWolfe, when the MySpace store opens in the fall, it will allow bands to sell their music for any price they wish, a move that's seen in the industry as a strike against Apple's strict 99-cents-per-download model.

"It's really no different than the mantra that we've taken in building the company," DeWolfe said. "All the features on MySpace — how we built them and the order — is based on user demand and what they've requested. [The pricing] is what bands on the site want."

While MySpace has more than 3 million pages devoted to bands and other musical performers, so far none of the four major labels have signed on to participate in the service due to their concern about security. The MySpace store will sell songs in the market-leading MP3 format, which can play on iPods but doesn't have any copy protection.

To date, the majors have been reluctant to sell songs online that don't come in a format that restricts how many copies of the track can be made. According to The New York Times, at least one major label — EMI, home to Coldplay, the Beatles, Dem Franchize Boyz, Janet Jackson and Pharrell — is in negotiations with MySpace, though DeWolfe would not comment on negotiations.

"There are four sets of users in this supply chain," he said. "The users on the site, independent bands, major indie labels and major labels. Eventually, we want to create a service that works for all those people in that chain." The choice to initially offer downloads in the MP3 format was made because it's one that is widely used, can be played on any device and was acceptable to most of the indie bands MySpace got feedback from.

Labels have complained for years about Apple's inflexibility on pricing, which has remained locked at 99 cents per song since the store's debut three years ago. The majors have agitated for a tiered system that would offer higher prices for new releases and lower ones for older songs and albums. MySpace's store will let labels set their own prices for songs. All the majors have put their catalogs into Snocap's database, which uses an audio-fingerprinting tool to prevent songs from being sold illegally, so if they eventually agree to work with MySpace, the transition would be almost seamless.

"One of the interesting things about this is that it's very contextual," DeWolfe said of the MySpace downloads. "It's not like you're flipping through a catalog of 10 million songs and hoping to find one that meets your fancy. You already have a relationship with the band by leaving a comment on its page or looking at their pictures, so it totally makes sense that during that process you'd be able to buy music in a social manner."

The potential problem, experts say, is that major labels won't sell songs in the unprotected MP3 format, and without those big-name artists, the MySpace store could have limited appeal. In a bid to boost sales, the MySpace store will accept payment through PayPal rather than credit cards and it will allow users to link to a band's storefront from its personal pages to recommend their favorite acts.

DeWolfe wouldn't make any predictions about potential sales but said that considering MySpace is one of the largest online music destinations, adding an e-commerce component could be "very successful." Though he downplayed talk of a face-to-face battle with iTunes, saying any label would love to have more outlets selling its music, DeWolfe said the plan is to eventually add major labels to the mix once a suitable way of offering secured downloads is agreed upon. "I think we could eventually be a significant player in the retail music game in an interesting way."

Another person who doesn't see the MySpace move as a frontal attack on Apple is Eric Garland, CEO of online market research firm Big Champagne. He said MySpace won't necessarily take market share from iTunes. "I still believe we're in the part of the curve where the pie is growing instead of at the point where we're slicing it up," Garland said. "We haven't saturated the digital picture yet, and we're still not selling as much popular entertainment online as we will very soon."

What's significant about the MySpace initiative is that it completes a circle that Fanning began seven years ago with the original, renegade Napster, which allowed users to illegally share music.

"It's not overstating it to say that since the original Napster popularized peer-to-peer distribution, this has been the natural venue for people to acquire entertainment media," Garland said. "You learn about all this entertainment in a community online, and then you have to go elsewhere to pay for it? Because of that gap, there is a lot of revenue lost in translation. Now if you learn about new music from someone, it makes sense that you should be able to acquire it from them."

[This story originally published at 2:27 p.m. ET on 09.05.2006]

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