Music and Social Networking Married by MySpace

By Jason Simpkins
Associate Editor, the social network web site owned by News Corp. (NWS), announced plans for a new online music download service that will pit it directly against Apple Inc.'s (AAPL) iTunes, raising the stakes on the digital media battlefront.

The new venture will be called MySpace Music and will offer free streaming music, MP3 downloads, concert tickets, cell phone ringtones and band merchandise.

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"It's really creating a robust monetization component to MySpace and having a focused music effort that could be the MTV of a new generation," a music industry executive who did not want to be identified before the deal was officially announced told Reuters.

MySpace is currently one of the largest promoters of music online, with more than 74 million unique users worldwide.

MySpace Music will receive a $120 million cash infusion from News Corp. Also in its corner are three of the "big four" major record labels - Sony BMG, Universal Music Group and Warner Music Group (WMG).

In return, a copyright lawsuit previously brought against MySpace by Universal will be dropped and the labels will give streaming and downloading rights of their catalogs to the new entity.

EMI Music Publishing, the fourth major label, is not a part of the deal at this time, but people involved in the negotiations said it would probably join soon.

"This is really a mega-music experience that is transformative in a lot of ways," said Chris DeWolfe, chief executive of MySpace. "It's the first service that offers a full catalog of music to be streamed for free, with full community features, to be shared with all of your friends."

Offering music online will put MySpace, traditionally a venue for social networking, in direct competition with high profile online venders like (AMZN) and Apple, who don't figure to go down without a fight.

Apple, which recently surpassed Wal-Mart Stores Inc. (WMT) to become the No. 1 music retailer in the country, may soon announce its own plan to offer customers unlimited access to the company's iTunes music library. The new business model would give customers free access to Apple's entire music catalogue in exchange for paying higher prices for the company's iPod and iPhone devices.

The Financial Times reported that Apple is negotiating with record labels for a deal to offer a monthly music subscription for the iPhone, as well as an unlimited music bundle for the iPhone and iPod. So far, those negotiations have hinged on a dispute over the price Apple would pay for access to the labels' libraries.

According to the Financial Times article, Apple is currently offering $20 per device for access to the labels' catalogues. Rival Nokia Corp. (NOK), which launched its "Comes With Music" service in December, paid Universal $80 per device for access to the label's full library.

For the music industry, deals like these have become an absolute necessity in an era of escalating online piracy and plummeting sales. Music sales dropped from a peak of nearly $15 billion in 1999 to $11.5 billion in 2006.

That has forced the industry to innovate, by seizing on revenue that does not come directly from its customers, such as the ad-supported element of the MySpace service. Riding on the coattails of Apple's iPhone is an opportunity the music industry will no doubt find hard to resist.

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