PROVIDING FREE MUSIC OVER THE INTERNET

Making Profits Out of an Ad-based Business Model

Dimitrios Margounakis, Dionysios Politis

Multimedia Lab, Department of Informatics, Aristotle University of Thessaloniki, Thessaloniki, Greece

Christina Boutsouki

Department of Economics, Aristotle University of Thessaloniki, Thessaloniki, Greece

Keywords: Music Industry, Online Music Distribution, Business Models, Digital Content, Advertising.

Abstract: The digital revolution and the new way of thinking in the 21

century (as a result of the rapid evolution of

technology) inevitably affect the music industry. Innovative kinds of e-business, which are virtual and

evolve dynamically in a digital environment, tend to prevail the traditional retail stores. The traditional

models should be revised, and new business models should be created, in order the electronic business to

succeed. Information technologies (IT) would have the main role in the new business models, while new

features will reconstruct the processes and the relations that constitute the music industry value chain. The

new face of music e-commerce requires new strategies and new B2C and B2B models. Such a model is the

advertisement model (ad-based model). Advertisements could be used as an alternative way of making

profits, instead of selling music, since Internet users are yet quite familiar with free music downloading. The

core idea of the proposed model of the paper is the distribution of free music with embedded sound

advertisement spots of sponsors over the Internet. Certain improvements on the model design can lead to an

integrated combination of the two most promising models: the ad-based and the subscription model.

1 INTRODUCTION

New digital technologies change radically the way

that music is distributed and “consumed”. The music

industry should be foreseeing and adaptive to these

changes, in order to maintain its competitive

advantage. The last years' decrease in the sales of

recording products worldwide and the consumers'

denial of paying for music leads inevitably the music

industry to revising its traditional business strategies.

The profitability of the music industry can be

maintained in the future only if consumers are

willing to pay for the music they “consume”, or

alternative ways of revenue are found. The

development of legal alternatives for music

“downloading” does not only fight the Internet

piracy, but also creates an opportunity for the

development of new income sources.

2 EXISTING BUSINESS MODELS

Many researchers have investigated the ways, which

may transform the face of music industry and

several new business models have been proposed.

Kwork, Lang, and Tam (2002) state that a music

distribution model may succeed in the digital world

only if the content is sufficiently protected. Gehrke

and Anding (2003) have proposed a peer-to-peer

(P2P) system, according to which each user pays for

songs downloading and gets paid for songs offering

for download. Different proposals from different

points of view can be found at (IFPI, 2002), (IFPI,

2004), and (Oberholzer & Strumpf, 2004).

As far as the recording production procedure

followed the classic way (Bockstedt, Kauffman, &

Riggins, 2005), there was only one business model:

the traditional model. With the advent of the Internet

and digital media, this model differentiated and, as a

result, two new business models occurred: network

models and hybrid models. An easy-to-use

framework is presented in this paper in order to

classify the models into 4 categories (Fig. 1):

Margounakis D., Politis D. and Boutsouki C. (2006).

PROVIDING FREE MUSIC OVER THE INTERNET - Making Proﬁts Out of an Ad-based Business Model.

In Proceedings of WEBIST 2006 - Second International Conference on Web Information Systems and Technologies - Society, e-Business and

e-Government / e-Learning, pages 93-99

DOI: 10.5220/0001250800930099

 SciTePress

1. Traditional models (physical

distribution / physical product)

2. Network models (online distribution /

digital product)

3. Hybrid models (physical distribution /

digital product OR online distribution /

physical product)

4. Mobile distribution models

Figure 1: A framework for business models in the music

industry. The arrow shows the transition from the

traditional model to the Internet models thorough hybrid

forms.

A lot of the newly appeared models are

classified as Network models, especially the purely

Internet models (prevention model, ad-supported

model, subscription model, music locker, ala carte,

etc.). Surveys about these models could be found in

(Fischbeck, 2000) and (Dubosson-Torbay, Pigneur,

& Usunier, 2004). The proposed model in this paper

is based on the ad-based model (or advertisement

model), which is presented in the next section.

3 THE ADVERTISEMENT

MODEL

The advertisement business model could be defined

as a strategic business model, whose main (and

determinative) source of income is advertising, and

not the provided service (usually free) to the

customer.

This model is very common in e-businesses (e.g.

Google), where several ways of advertising –

sponsorships from third parties are used. On-line

advertising is used more and more lately, since it has

many advantages comparing to traditional

advertising (TV, radio, magazines etc.). Another

reason for the on-line advertising growth is the big

increase of Internet users. Advertising over the

Internet (or on-line advertising) is the kind of

advertising that makes exclusive use of the Internet

(in particular the Internet’ s main service: World

Wide Web) as a means of promotion and

communication (Zeff & Aronson, 1997).

A web advertisement could be of several types:

banners, massive advertisement e-mails, logos,

promotional websites, hyperlinks, pop-up windows

etc. The main reason for a company to use on-line

advertising is that the evolution in multimedia

technology allows the transmission of big volumes

of information to a large number of recipients (target

groups) with minimal cost, but also with

significantly low cost for the readjustment of the

message content (even for ad-targeting)

(Gleason,1995) (Boyce, 1999).

The use of the advertisement model for music

distribution via Internet is not a new idea. There

should a legal way for the audience to get what they

wanted: free music. Therefore, some sites started

using advertising as an alternative way for collecting

revenues, while the most of the other models were

selling (and still sell) music. For example, EverAd

started in 1998 to provide ad banners together with

downloads of several types. As far as music is

concerned, EverAd signed with: over 12 music sites

in two years in order to distribute their content (the

famous www.Listen.com is among them), 60 labels

and over 40 companies-sponsors (Hansen, 2000).

EverAd uses encryption technologies that restrain

the use of the downloaded music files, so as they can

be reproduced only in parallel with the appearance

of visual ad spots on the computer’s monitor.

Another approach of the model (though not in the

Internet environment) is the case of SingTel Mobile

in Singapore. After only a few months from the

beginning of the service, thousands of people

registered in SingTel Mobile, so as they win 2

minutes of free local or long-distance calls from

their mobile telephone, every time they listened to a

10-seconds advertisement spot before their calls

(Eklund, 2001). SingTel started this program in co-

operation with Spotcast, which specializes in

advertisements transmission. SingTel paid $600,000

to Spotcast for the software platform and still pays

current maintenance fees. Spotcast’ s technology

gives SingTel the capability of creating detailed

profiles of its subscribers and therefore sending

personal ad spots to them, according to their profile

(ad-targeting). SingTel recouped its initial

investment from ad revenues in about a year

(Turban, King, Lee & Viehland, 2004).

WEBIST 2006 - SOCIETY, E-BUSINESS AND E-GOVERNMENT

3.1 Making Profits Out of

Advertisements or

Subscriptions?

Internet in its present form provides many services

to the users for free. However there is one fact:

someone has to pay for these services. The solution

to this is found in sponsorships: there are sponsors

that pay for the services. Another issue is that if you

don’t give something for free, a competitor will do

it. In this case, the competition simply delays the

cost of free services. Sooner or later, the business

should bring in profits. This means that the

competitors should adopt a profitable business

model.

The main revenue models for Internet services

are two: the subscription model (users pay a

subscription for the service on a monthly or annual

basis), and the ad-based model, where users click on

a banner and the sponsors pay to the service provider

an amount of money (in proportion to clicks). This is

a great opportunity for e-marketers. As the number

of free services go up, those free service providers

will want to collect money through sponsors and the

more they want to collect the better it is for e-

marketers because it gives them better opportunity

for marketing (Aleem, 2005).

All in all users will expect subscription-based

models to be replaced with ad-based revenue models

provided ads don’t act as an annoyance. As data

mining technologies and methodologies evolve, ad

targeting will improve. At present some sites have

resorted to obtrusive ads — the kind that users must

click to proceed to the site content (Aleem, 2005).

There are two points about the question:

Subscription or Advertising? Some analysts believe

that the subscription models, in which labels have

unlimited access to the content for a certain value,

offer the greatest hope for a viable music business

Internet model. On the other hand, other analysts

believe that free content will always be more

attractive than any payment plan, so the demand for

ad-supported music will grow faster than the

demand for subscription services. Moreover, Internet

advertising is becoming more and more intelligent,

resulting to profits for e-marketers and companies

that use it as a main income resource.

Figure 2 shows the prevailing ways, with which

labels win money from e-business. The graph is

based on a research with interviews and

questionnaires to 250 label managers in 10 countries

of Europe (Krueger, Swatman & van der Beek,

2004).

Although the digital content sales comprise the

main income source, this is true only in a small

percentage, since only 34,7% of the labels claim to

win money that way. Online advertising stands in

the 4

position (after the indirect merchandise sales

and the newsletters) with 18,4%. At the same time

however, the use of advertisements as an income

resource is a rapidly evolving area, which is

predicted to bring great numbers for use and

profitability in the near future.

It would be logic to conclude that the best

solution at the moment is a model that combines the

two ways: the subscription- and the ad-based. Such

an integrated model for music distribution over the

Internet is presented in the next section.

4 THE SOUND-EMBEDDED

ADVERTISEMENT MODEL

The proposed model of this paper can be seen in

figures 3 and 4. It is a purely Internet-based model,

without, however, prohibiting the selling of physical

CDs through the e-shop. One can clearly see from

the figures that the core of all the transactions and

the component relations in the model is an e-shop (if

we finally accept that there is no physical CDs

distribution, then the shop does not even need a

warehouse, so the model presents an absolutely

virtual shop).

The central idea of the model is the distribution

of music with embedded sound advertisements

within a musical piece. The basic model can be

called (and will be from now on through this paper)

Sound-Embedded Advertisement Model (SEAM). If

this basic model is integrated with the functions of

other already existed models, then SEAM turns to

the Integrated Sound-Embedded Advertisement

Model (ISEAM).

The basic model SEAM supports the one-way

business-client relation, where the client uses the

service absolutely free (therefore the term ‘client’

proves to be improper – the term ‘user’ will be used

Figure 2: Labels incomings from Internet.

PROVIDING FREE MUSIC OVER THE INTERNET - Making Profits Out of an Ad-based Business Model

from now on). The user is able of downloading any

number of full MP3 songs free of charge

. However,

those songs contain sound advertisements (just like

radio spots) during the song. All the music files will

lie on the central database of the e-shop’s server and

will be provided by the labels.

Figure 3: The basic Sound-Embedded Advertisement

Model (SEAM).

The economic structure of the basic model is

explained next: Each company/ organization that is

promoted through the musical songs pays the

proportional value to the e-shop for the

advertisement. Likewise, the labels themselves can

promote their own products (e.g. a new release

promoted in a song of another artist, even an artist

belonging to another label!). These spots will also

cost some money from the label to the e-shop. In

order any conflicts to be avoided, the distribution

and the placement of the advertisement spots is

suggested to be in absolute province of the e-shop,

after an agreement with the interested parts. In other

words, since a song is added on the server collection,

this could bear any advertisement spot.

Figure 4: The Integrated Sound-Embedded Advertisement

Model (ISEAM).

The labels gain money from the e-shop in

proportion to the downloaded songs. According to

the SEAM model, the artists and the rest stakeholders

are paid by the labels, so there is a profit margin for

both sides (e-shop & labels).

A main parameter, which differentiates SEAM

from ISEAM, is that in the second integrated model,

the artists are paid directly from the e-intermediary,

absolving the labels this way from portion sharing.

The reason why this is possible in the integrated

model is that the business-client relation is yet a

two-ways relation (and the word ‘client’ is proper in

this case). This means more effective incomings for

the e-shop, which can allow the artists rights

payment again in proportion to the sold musical

pieces.

ISEAM is not limited to free musical pieces

offering to the customers. This is used as a

promotional tool, so as the visitors to finally become

subscribers of the site, either using a subscription

model, or an a la carte model. Namely, the final aim

is the visitors starting buying full musical pieces,

which are ‘clean’ (without advertisements), through

the Internet.

Since the final aim of the integrated model is

selling, more marketing actions must be taken by the

owners of the e-shop, in order the site to be more

attractive to people. Although the stand-alone idea

of free downloading of music files with embedded

advertisements is really attractive, other traditional

techniques can also be used (free samples

downloading, e.g. 30 sec. of a song in low or high

sound quality – with or without advertisements). If

the subscription of a small amount of people is

finally achieved, then we can discuss about more

money flowing into the e-shop and therefore greater

flexibility at issues like co-operation with external

sponsors, labels etc.

4.1 Observations

On that score, a short discussion (observations and

declarations) about the proposed model follows.

First of all, a very crucial factor of the success of

the model is the advertisements embedment

procedure. Management of the e-shop should pay

much attention to this procedure, since it comprises

the business metacenter. It is obvious that the

advertisements should not be annoying to the

audient, otherwise he/she will not be in favour of the

site, or even worse he/she will discredit it. Of

course, an ad spot or a speaker that edges into a song

during a radio program may sometimes be annoying,

but not always. Specialized researchers have to

judge which parts of the songs are advisable of

putting the spots into. Also, another issue is the

appropriate duration of the spots. For example, a

spot that interrupts a musical piece, while the artist

WEBIST 2006 - SOCIETY, E-BUSINESS AND E-GOVERNMENT

is singing, is unacceptable. On the other hand, it is

better this to be done on an orchestral part of the

song. There are many difficulties for analysis at this

point, e.g. hip-hop pieces with many and long lyrics

should be analysed by specialised musicians,

psychologists and marketing consultants.

One could wonder: Finally, what’ s the difference

with radio? There are many differences. First of all,

since we are not talking about streaming audio, but

MP3 downloading, there is not a music sequence

that plays repeatedly, but a chosen file collection on

the hard disk of the user, who is able to use it as he

wishes. Moreover, the user is not in need of being

online to play his music. In other words, the user has

all the advantages of an MP3 collection. The only

“strike” may be the obligatory audience of ad spots,

which is however counterbalanced by the free

supply of all the music files. We should mention at

this point that the system makes no difference from

radio from the sponsors’ point of view. This a big

advantage, because the essence of the model can

therefore be perceived by a conventional

organization just like radio advertising. Thereby, the

sponsor can compare the pricing with the

corresponding radio advertisement. Another

advantage (comparing to the radio case) is that

SEAM addresses a much larger number of people

worldwide: all the Internet visitors.

Another major aspect for all new models of music

distribution via Internet is piracy. Some more

experienced users may wonder why they should use

SEAM or ISEAM, while they can (in many other

ways) find the same songs in MP3 format over the

Internet for free without embedded advertisements.

This is a crucial question for all proposed models in

the new music community. The answer is: there is

no meaning in seeking for solutions for the music

industry, if piracy is not eliminated and people

don’t comprehend that the copyrighted music

files sharing via Internet is illegal. Obviously,

without this premise, the function of SEAM (or any

other model) is destined to fail. All the proposed and

applied models repose on the assumption that more

and more people (music consumers) start to be

conscious of the law’s copyright issues.

Some comparisons should also be done here to

ad-based models that use visual advertisements (like

TV spots). Visual spots are usually pop-up windows

that the user is constrained to view in order to

reproduce his music (usually streams) on his PC. It

is true that visual spots are more impressive than the

audio ones. But they could be more disturbing to the

user than the audio spots, because they get at the

user’s concentration and attention to his work. Also,

the user is used to listen to (and not view) ad spots

while listening to music (from radio). Regarding the

issue of the ad targeting (passing its message to the

music audient), it is more likely to happen to the

audio case. For example, the user may move the

window of the visual ad somewhere at an edge of

the screen (if he is not allowed to shut it at all). And

even worse: the user may just listen to music and not

be in front of his PC monitor, resulting to never

viewing the ad (visual ads don’t include sounds). On

the contrary, the only way of not listening to an

audio advertisement of SEAM is by forwarding the

song at the time of the spot (which is practically

farfetched· stopping a song for a few seconds is not

worth it!).

4.2 Argumentation

Some explanations, concerning why this model has

been chosen and designed like this, are given in this

section.

First of all, SEAM is free of charge. There are

three reasons for this choice:

1. The listeners, who have experience on

using the new technology and music

downloading, are used in getting what they

want for free (even if that is illegal) and

will not easily accept a different way.

2. There are still many people who haven’t

apprehended the added value (and the

proprieties) of music files and streams yet.

3. There is still hesitation in using credit cards

and giving personal information on the web

for a lot of people in many countries.

Consequently, the transition from free music to

charging music is difficult (for the present)

(Simpson, 2002). Although some online ventures

that function in a subscription base have started to

develop, it is still too early to say that the

subscription model is a profitable model.

Nevertheless, the integrated ISEAM encases some

subscription functions.

Also, SEAM is a pure network model. We

should not ignore the recent trend towards e-shops,

which is the emanation of technologic evolution.

Researchers like Durlacher (2001) believe that

digital distribution will constitute the basic form of

music distribution in the future, while free

downloading will hold on and bear down all the

efforts of music industry to destroy its influence.

According to him, the only way to encourage the

customers to buy digital music is to provide very

high quality, comfort, easiness and added value to

the products, so as they can be more attractive than

free access to music.

Because of the fact that ad-based models do not

constitute a new idea, but they pre-exist and work

(e.g. EverAd), the choice of SEAM attributes has

PROVIDING FREE MUSIC OVER THE INTERNET - Making Profits Out of an Ad-based Business Model

been done in a way that service differentiation is

achieved. We consider that this is the most

favourable way for a model to succeed in the present

music industry environment. A totally new model

would bear a great risk in manifestation with

uncertain results. On the contrary, an already tested

(and accepted by many people) model, like the

advertisement model, is a very good base for a new

proposal. Moreover, a business model should be

differentiated from its uniform ones, in order to

succeed. The music product in question cannot be

differentiated: digital music files are as they are, and

should be delivered through Internet. When the

product is not possible to be differentiated, the secret

for somebody to prevail his competitors is usually

the increase of services that add value to the product

and the improvement of their quality (Kotler, 2000).

The customers in SEAM are the sponsor-

companies in essence, not the music audience.

Taking into account this fact, the added-value

services are obvious: ‘smart’ advertisement on

certain target groups and intelligent systems for

better ad-targeting are options that any advertised

organization would wish to have. Moreover, the

users will be completely satisfied from the free

music distribution via Internet.

5 IMPLEMENTATION AND

LIMITATIONS

Some problems and limitations at the

implementation of SEAM and ISEAM are

mentioned in this section. We will examine some

general problems for all the network models and

then make them specific to the proposed one. We

will also discuss some more specific limitations.

A major issue for online music distribution is

DRM – Digital Rights Management. The great

number of DRM technologies and their licensing

costs has increased the cost for a content distribution

e-business so much, diminishing therefore the

feasibility rate. Selling music without DRM

technologies over the Internet contains the risk of

Internet piracy and that’s why many labels insist on

their use on all business models (Virtanen, 2003). A

model like SEAM should use such mechanisms for

many reasons. The most important of them is for

gaining the support of labels and independent artists.

The point here is that the peculiarity of the ad spots

in the model requires the development of specialized

DRM systems, which will increase the already high

costs of those technologies.

If we examine the case of materializing such a

model in a domestic market (e.g. Greece), then

several problems arise. Because of the high costs,

online music shops are profitable only if there is

great demand. In Greece, as well as in other

countries, the domestic market is small and the

potential target group of pure network shops is still

relatively insufficient. Moreover, it is not desirable

from consumers to download (how about buying)

music from the Internet without a broadband

connection, because of the cost and the slow transfer

through a modem or an ISDN connection. xDSL

technologies (and also T1,T3) that offer a great deal

of speed, are not yet common in our country and

cost quite a lot for an average user. Apart from these

problems, Virtanen (2003) mentions also others

(while describing the case of Finland about the

adaptation of music distribution over the Internet),

e.g. the slow learning and acceptance of the new

way of buying from domestic consumers.

Although the technologic aspects on the

implementation of the model are not the subject of

this paper, we could nevertheless provide some

relevant guidelines. As Durlacher (2001) states,

quality and added value on products and services are

the key factors for any new Internet model to

succeed. On this direction, a suggestion for the

model implementation is CDI (Content Distribution

Internetworking) networks, with which 4 really

important quality factors could be achieved to our

model (Cushnie, Lopes & Hutchison, 2002):

1. Improvement in network performance

2. Reduced distribution costs for content

providers

3. Branding of products and services

4. QoS mechanisms and quarantees

6 CONCLUSIONS

Theoretically, the proposed model could be vital and

successful under certain conditions. If we accept the

fact that the future of the music industry is the

distribution of digital content via Internet, then

SEAM stands on the evolution peak, since it is

purely a network model.

The key factor to success is the free service

offering. Many different payment-based models may

be successfully developed in the future, but free

content distribution (even including embedded

advertisements) will always comprise a tempting

proposal, even if it concerns a user trial before the

buying of the original recording.

An electronic model turns to be successful, only

if it is widely accepted by people. SEAM (in

particular) creates a perpetual circle of success: more

and more people will download files and, as a result,

more and more sponsors will promote their services

through the portal. As long as these numbers grow,

WEBIST 2006 - SOCIETY, E-BUSINESS AND E-GOVERNMENT

labels will repose their recording products to the

portal. Moreover, the more the titles that are offered

by the model are, the more the consumers will

become, and the circle goes on the same way (Fig.

5).

The circle of the figure makes sense, since the

consumers are the factor that `prescribes' the success

of a market and the strategic moves of the

stakeholders. Relative researches (Krueger,

Swatman, & Van der Beek, 2004) have shown that

the customers mostly affect strategic decisions of

labels. Consequently, labels are `sentenced' to follow

the proposed model, if it is to be accepted by the

consumers. This is inevitable but may come late in

time (labels have proved their latency in adopting

new technologies, having being stuck to the old

structure of music industry for a long time)

(Virtanen, 2003).

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PROVIDING FREE MUSIC OVER THE INTERNET - Making Profits Out of an Ad-based Business Model