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South By Southwest: Composing a New Music Model

Eighteen hundred bands, music industry execs, and thousands of fans are gathering in Austin for the annual South by Southwest music conference and festival.

The crowds are huge and the mood is positive — you'd never guess that piracy has all but decimated the music industry, with music sales plummeting by over half in the past decade.

Concerts are a rare bright spot, with worldwide touring revenue up 12.5 percent last year despite the pullback in consumer spending. And the booming concert business is played out here at the festival, where over 1800 bands will perform in four days.

Despite the festive concert atmosphere, the big issue at both panel discussions and at music venues is how to revive music industry revenue. One novel idea attracting quite a bit of attention: giving away music for free. Consumers have become so accustomed to pirating music; some labels are starting to give away songs for free, getting paid instead by advertisers.

Freeallmusic.com gives users up to 20 free song downloads from Universal Music and EMI each month. In exchange for each song users have to watch a 15 to 30 second commercial. Advertisers including Coca-Cola, Warner Brothers Television, and Zappos are on board — they pay the website about $2 dollars per download, much of which goes to the music label. In exchange the advertisers get access to Freeallmusic.com's users who are now testing the system. Music lovers seem excited — over 100,000 have signed up for a wait list.

Free seems to be the new trend.

An Australian Web site called Guvera.com is launching in the U.S. next week with a slightly different model: it directs users to download free songs from branded websites like Harley Davidson and McDonalds . Spotify is a popular British site, with 2 million users in the UK. It streams music from all the major labels along with ads and shares that ad revenue with the labels. It was expected to announce its expansion to the U.S. here at South By Southwest. It's still finalizing its deals and now plans to launch sometime this year.

The free, ad-supported music model faces some major challenges.

Billboard editor Bill Werde tells me that he thinks music labels are resistant to the idea of giving away music for free to customers, even if advertisers compensate them. They don't want to get users out of the habit of paying for music, if they still do actually pay for music. But at the end of the day it'll all come down to advertisers. Will advertisers get the kind of return on investment they need to justify spending about two bucks per song download? Will users absorb the brand message or will they procrastinate during the ad by clicking elsewhere? It'll take some major advertising supply for this model to scale to the likes of an iTunes. We'll be watching.

Questions? Comments? MediaMoney@cnbc.com

  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.