• by Laurie Sullivan  @lauriesullivan, November 13, 2008

Online music moguls took the stage at the Piper Jaffray Global Internet Summit 2008 in Laguna Beach, Calif. to debate business models for digital content. All agreed that an ad-supported free music model makes the most sense, but the biggest challenge for distribution channels has been to make money.

For starters, the cost--about 1 cent per track per stream--doesn't allow sites like MySpace Music to sell ads at a CPM rate high enough to justify the spending, according to David Hyman, CEO and founder of MOG, a Berkeley, Calif. music-blogging platform that gives advertisers the ability to connect with consumers through their love of music. "The average CPM for MySpace is $1 or less--that's a tenth of a penny per track per stream," he said. "They're shooting too high, getting a piece of a very small pie vs. bringing the pricing down to the point where lots of companies can jump in."

Hyman said music labels are likely making money on less than 1% of all online music that gets downloaded or streamed because many young people who typically want the music cannot afford to purchase it. Bringing the prices down or offering ad-supported free services would generate more business for the labels.

Indeed, an ad-supported digital music download model would solve piracy and digital rights management issues, but the model first needs to separate the value of the advertising from the song, said Joe Rogness, co-founder of San Francisco-based IndieZone, a music marketplace. "It would allow the price of the music and advertising costs to fluctuate," he said.

Panelists agreed that the traditional definition of digital rights management (DRM), the technology prohibiting the unauthorized copying of digital music, has made matters worse. Rogness said that while "DRM is dead," the industry needs to protect the rights of content owners by compensating them when music moves from one individual to another. Every song or digital asset needs to carry a contract that give a monetary sum back to the owner, whether it comes from the person listening to the music or the brand supporting the distribution with ads.

Richard Gottehrer, founder and chief creative at The Orchard Enterprises, said Nokia launched two devices in the United Kingdom filled with music. The phone maker negotiated the deal with the recording labels to give away the music with the purchase of the device. Consumers purchase the product and service, and they get music free.