CANNES, France – When SpiralFrog announced a deal with a major recording company to offer free, ad-supported music downloads, it made headlines as a bold but natural step — giving the label a share of the fast-growing Internet advertising pie, while squeezing out pirates.
Soon after Vivendi SA's Universal Music Group came on board in August, EMI Group PLC also struck a deal with the formerly obscure startup. Suddenly, downloads from mainstream music catalogs were to become free.
But the concept appeared this week to have suffered a setback. SpiralFrog sent its attorney to the Midem music industry gathering in Cannes to replace former CEO Robin Kent, who was ousted late last month — when the service had been set to go live.
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"There's been a management shake-up," Marc Jacobson of lawfirm Greenberg Traurig told a conference at which Kent had been due to speak.
SpiralFrog still plans to launch, Jacobson said, but has no firm date. He declined to elaborate and made no comment on speculation that the company had been unable to sell enough advertising to meet royalty fees.
Despite a boom in download sales over the Internet and mobile phones, the music market as a whole is shrinking as digital revenue growth fails to offset a decline in CD sales.
Total music revenues fell 3 percent to 4 percent globally in 2006, according to estimates by IFPI, the industry's leading global body.
Illegal file-sharing accounts for up to 100 times as many song downloads as Apple Computer Inc.'s (AAPL) iTunes, the market leader in legal online music sales, according to Intent MediaWorks, a U.S.-based consulting firm that specializes in digital distribution.
SpiralFrog and other embryonic ad-supported services promise a new approach to tackling piracy. Proponents see massive demand from peer-to-peer users who, they believe, would gladly put up with commercial messages in return for the peace of mind that legality brings.
If you can't beat them, the theory goes, then at least make some money out of them.
"It's such a significant stream that, if you can monetize it and take it over, you can get paid a lot of money," said Les Ottolenghi, Intent's founding chief executive.
The attention generated by SpiralFrog "proves there is an interest level to find a solution to ad-based media and entertainment for the consumer," he said.
The market may be there, but doubts remain over whether the terms on offer can persuade enough established recording companies to enter it seriously.
Although SpiralFrog had signed up EMI and Universal before its launch plans were canceled, it had failed to win deals with the other two majors, Warner Music Group Inc. (WMG) and Sony BMG Music Entertainment, a joint venture of Sony Corp. (SNE) and Bertelsmann AG.
Thomas Gewecke, Sony BMG's executive vice president for digital sales, rejected suggestions that hardened file-sharers could be tempted only by free offerings.
"They don't expect their Xbox to be free," he said. "They don't expect the ringtone on their cell phone to be free."
Although signed up to SpiralFrog, EMI still harbors reservations about ad-supported download and subscription sites.
Roger Faxon, who heads the publishing division, said the company was ready to experiment with such services — but only "if we can understand the economic model and how our songwriters will be appropriately compensated."
EMI is negotiating to sell its music on Google Inc.'s (GOOG) video-sharing site YouTube.com and News Corp.'s (NWS) popular online hangout MySpace.com, Faxon said, declining to elaborate. "I tend to believe it's these models that will capture the public's imagination, rather than the straight download models."
Free music has always had a place in the industry, other observers point out, and recording companies should not try to deny it a new role in the digital age.
"Radio sells music for free," French economist Jacques Attali said during a Midem meeting. "But radio is doing very well with advertising and other kinds of revenues."
Black Eyed Peas frontman will.i.am — in Cannes with the band's female vocalist, Fergie, for a joint appearance at France's NRJ Music Awards — gave his own take on the industry's troubles.
"To be honest I'm afraid of the music industry falling apart," said will.i.am, whose real name is William Adams. "The thing that makes me nervous is the hesitation that record companies have about the new technologies."