Record labels fear MySpace may soon be calling the tunes
Although it has been around for less than three years, the on-line social networking service known as MySpace.com is already a giant, with more than 100 million registered users and Web traffic levels that are close to those of industry leaders like Yahoo and MSN. And now that it is owned by media conglomerate News Corp., which bought it for $580-million (U.S.) last year, it has deep pockets too.
As with any such phenomenon (Google being the most obvious example), the nightmare scenario for many companies is what happens to their business -- and especially their profit margins -- when a giant like that decides to dip its toe into their market. Now it is the music industry's turn to feel the shivers, after an announcement last week that MySpace plans to enter the music business.
The social network said it is launching a music store later this year, through which any of the estimated three million musicians who use MySpace will be able to sell their songs and CDs directly to their fans. According to Nielsen NetRatings, MySpace has about 50 million visitors a month in the U.S.
Ironically, the site is partnering with a company called Snocap, a digital music service run by Shawn Fanning -- the same Shawn Fanning who created the Napster music-downloading service while still in university (the site later went bankrupt as a result of lawsuits from the music industry and was acquired and relaunched as a for-pay service).
The four major global record companies (Universal Music, Sony BMG, Warner Music and EMI) have been suffering over the past several years because of illegal file sharing and have only begun to recover some of that lost ground recently, thanks in part to arrangements with legal download services such as iTunes, Rhapsody and Napster.
The threat from MySpace is that artists could use the site's massive traffic and interactive features to build a following, and translate that into sales without ever dealing with a traditional record company. And if such an artist did wind up working with a label, he or she would likely be in a much stronger position than the typical struggling artist, which could eat into a label's profit margins.
Already, there are several examples of groups that have used MySpace links and social networking tools such as tags and blog "widgets" to build their popularity. Music industry watchers say the debut album from The Arctic Monkeys was the biggest-selling record in British history in part because of the word of mouth that emerged from MySpace.
In a sense, MySpace could bring a kind of direct sales model to the music business, in the same way that Dell disrupted the traditional retail computer industry. That kind of approach isn't going to lead to the demise of the traditional record companies, just as Dell didn't kill Hewlett-Packard or IBM. But it certainly cut into their sales and profits, to the point where IBM decided to get out of the business altogether and HP acquired Compaq.
The labels aren't likely to want to get involved with MySpace's new music venture -- at least not right away -- because the site says it won't use any digital rights management or DRM (software tools that keep songs from being copied or shared, or restrict where and how often they can be played). However, at the same time, they have shown signs of wanting to explore new models: Universal and EMI recently announced deals to distribute ad-supported music for free through a service called SpiralFrog.
Snocap and MySpace say their venture will take only a small fee for handling the payment for artists, and that any MySpace user will be able to incorporate a "virtual storefront" for their favourite group.
Music companies aren't the only ones that face the threat of disruption from MySpace. In a recent interview, the co-founders said they have their eye on the movie industry as well. The giant still has plenty of toes.
