• by Ross Fadner , January 10, 2005

Providers of downloadable MP3s may soon display ads at their online music stores, executives said last week at the Consumer Electronics Show in Las Vegas.

"It's safe to say that yes, we will be selling advertising on MusicMatch and Yahoo!'s other music services in the next 12 months," said Christopher Allen, senior vice president of strategic planning at Yahoo!'s MusicMatch. The Mountain View, Calif. Web giant already sells spots on its streaming radio service, Yahoo! Launch.

Robert Acker, vice president, RealPlayer and music services at RealNetworks, added that his company is considering contextual advertising because relevant ads "add value to the consumer experience," aside from generating revenue for the company. "To be in the Internet space and not look into it would be foolish," he said, although he added that it's "not inevitable" that Rhapsody, Real's digital music store, will one day sell ads.

But some think that consumers might not stand for ads on services they pay for.

"I don't think we're about advertising," said Ken Lombard, president of Starbucks Entertainment. The ubiquitous coffee company is looking for new ways to monetize its recently launched in-store music service, Lombard said, but "it probably won't be advertising," he said. "We need a consumer focus on a quality customer experience."

In March, Starbucks launched an in-store music service with HP that lets customers download songs from HP computers located in each store. At the so-called "Hear Music" media bars, consumers can burn to CD their custom-made playlists for $8.99 for the first seven songs and 99 cents per additional track. The service is already available in stores in Seattle, Los Angeles, and Austin, and is expected to expand to 2500 locations within two years.

Lombard said the coffee shop chain has greater margin for error in exploring digital music because Starbucks' core business is not related to music. The new service, said Lombard, is "not about selling more coffee--it's about integrating coffee and music."

Consumers have been able to legally purchase downloaded music for about 16 months now, but sales have yet to catch fire. Only 16 percent of adults have bought digital tracks, according to December 2004 JupiterResearch, while 17 percent use subscription-based services. Ipsos, another research firm, said in November that 20 million Americans had purchased digital music.

Industry executives agreed that the consumer experience at digital music stores has to change. Greg Cohen, president and co-founder of MusicNow, which was recently acquired by Circuit City, said "current offerings are too complicated," and that consumers feel "disenfranchised" by services that focus mostly on mainstream music. He said consumers want simplified services they can personalize.

"Music shouldn't be locked in one location," Real's Acker added. He said that the confusion surrounding digital rights management and device compatibility deters consumer adoption both of services and digital music players. He added that consumers should also be able to stream content on wireless-enabled portable devices.