Michele Mackenzie
SpiralFrog launches ad-funded music service
It was announced today in the FT that music service start-up SpiralFrog, will launch an ad-supported service in December this year. The company has reportedly received backing from Universal Music and is negotiating with the other major labels. Comment: SpiralFrog's announcement constitutes another interesting move into a crowded digital music space. There are already hundreds of music service providers in the European market, most of which are struggling to compete with Apple's dominant iTunes/iPod ecosystem. Most are providing a mix of subscription and download services but few have yet dabbled with advertising, although we expect more to explore this avenue as a larger share of advertising revenue shifts from traditional to online media. There is little detail available on the new service. At first sight, SpiralFrog does not appear to have any plans to upsell a premium service to its end-users. In our view, the key value of the advertising model lies in using it to transition users to paid-for services, so perhaps this will be introduced later. In addition, it does not appear to have a “portable” or “mobile” component, which again would be a faux pas in an age when users want to be able to port their music to other devices and take it with them. And of course, cellular access is becoming more and more important in a world where users want access to their music at all times. Finally, there is no mention of which audio codec or DRM solution will be used, although we assume that the record labels will insist on some DRM being in place. All of these details are still to be clarified. Due to slow adoption of paid-for services, many service providers are eyeing the ad model as a possible saviour. Earlier this year, Napster announced that it was introducing an ad-funded model for streaming music. This followed slow adoption of its subscription services. Napster announced at the end of June 2006 that it had witnessed a 50% increase in monthly unique visitors and a run rate of 60m page views per month. Napster's strategy is to attract more visitors to its site through its free music offering and convert them to paying subscribers over time. This enables it to reduce its subscriber acquisition costs. While we remain cautious about the ad model generally and question how many users will actually buy a track after listening to it up to five times, we acknowledge that the ad model allows service providers such as Napster to transition users from a possible illegitimate music offering to a “free” (but legitimate!) music service to a paid for model. However, in the quarter since it launched the new service, Napster saw a 7% decline in paying subscribers.However, the advertising pot is not bottomless. Those that succeed in attracting advertising revenue will be those that can guarantee advertisers the right audience - in this case “eardrums” rather than “eyeballs”. Few service providers are currently in a position to provide the large audiences that advertisers require, and few pure music providers have the heritage of building a business funded by advertising. However, companies such as Yahoo!, which offers an ad-supported streaming music service, are far better experienced in dealing with advertisers and have a far wider reach. There will be many challenges ahead.
