Ad-Supported File Sharing? It Doesn’t Add Up

Ad supported file sharing? Not likely.

QTrax, a new startup that would allow users to legally download free music like any other file-sharing service, recently announced it inked deals with all major record labels . (The deals later were said to be in jeopardy.) QTrax would be supported by advertising and would pay ad revenue out to copyright holders based on the frequency their songs were downloaded:

To get the industry on board with P2P, Qtrax will sign over “the lion’s share of revenue” to labels and publishers, paying out on per-download and per-play bases. The site also categorized the music of the world into three lists. One list includes artists who do not permit their music to be made available online in any capacity. “The blacklist is fast disappearing — my prediction is that in a year, the blacklist won’t be in existence,” said Klepfisz. The white list consists of the standard digital catalogs from major and indie labels — the same 5-million-plus songs that are on iTunes.

The gray list constitutes the difference between what’s available on iTunes and what’s available on BitTorrent. “Then you have the gray list, which is that vast body of stuff that’s out there on P2P, where there are rights holders, but the rights holders themselves may not even know that a song is being downloaded frequently…. To the best of our ability, we identify the rights holder and pay them a percentage of the advertising revenue. In the minority of cases where we can’t identify a rights holder, we will actually put up the song for claiming, and will reserve the portion of the ad pie until that song is appropriately claimed.” As with other free, ad-supported services, revenue comes from advertisers who want to target ads to specific types of listeners.

There are a few major problems with this model.

First and foremost, I can’t see how the ad revenue generated by QTrax would be anywhere near sufficient to satisfy the major labels’ greed. I have a fair amount of experience in online advertising. The average cost per thousand ad impressions (CPM) for most publishers that I’ve seen hovers between $1 and $3. MySpace advertising goes for $0.10, Facebook for $4. Higher end sites like the New York Times can charge as much as $30-$40.

Let’s say QTrax can get CPM prices in the higher end of the range. The average user might see 3-5 ad impressions per track downloaded - they load up the browser (1 impression), do a search (1 impression), do another search (1 impression), and download a song (1-2 impressions). That means QTrax will make, assuming a $30 CPM rate, about 12 cents per download. Even if “the lions share” of the profit goes to the record labels, it’s still only about 12 cents per track. And only if CPM rates are sky high.

Compare that to other distribution mediums. Record labels make about $1.70 profit on each CD sale. They make $0.65 on each iTunes download, and they’ve loudly complained that iTunes pricing is too low. And they spend millions on the RIAA and frivolous lawsuits. What makes anyone think labels are ready to settle for making $0.12 per track?

The other major issue is one of market share. What incentive do users have to download music through QTrax as opposed to any of the other free peer-to-peer platforms? QTrax offers no additional benefit to the user beyond legality. Clearly, the illegality of copyright infringement hasn’t dissuaded most. In fact, the number of file sharers has grown over the years.

On top of that, QTrax downloads might come wrapped in DRM. This could impede functionality and put restrictions on users, driving more people away. While QTrax might be able to gain some users, it’s hard to see it replacing traditional file sharing anytime soon.

The ad supported model has been great for some areas of the Internet, making products like news and information free for all. Music presents a tougher challenge, partly because the profit margins are so high and partly because the public is used to free music without ads. The numbers just don’t seem to add up, and QTrax doesn’t present any new features that would make it more useful to customers.

The customer is king in the marketplace, and QTrax only looks to be servicing the record labels. I doubt it will last long.

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