But now, the federal district court judge who presided over the trial may have changed his mind. Judge Michael Davis of Duluth, Minn., has stated that he might have “committed a manifest error of law.” He is considering negating the RIAA victory and ordering a new trial.

What has changed his mind? in the original case, Judge Davis instructed jurors that they could find Thomas guilty of piracy for having made tracks available for downloading via Kazaa — whether or not it was shown anyone actually downloaded the files. According to Davis, he originally planned to instruct jurors that tracks actually had to be downloaded to prove copyright infringement. But at the last minute, the RIAA convinced him to change his instructions — and instead he told jurors that merely making tracks available could constitute copyright infringement.

The jury found Thomas guilty of making 24 tracks available on Kazaa. They ordered the single mother to pay the RIAA $220,000 for infringement.

A lot has happened since then. In April, the record industry lost a major court battle when a federal judge in Phoenix ruled that placing music in a Kazaa folder doesn’t in itself infringe on the owners’ copyright. “Merely making an unauthorized copy of a copyrighted work available to the public does not violate a copyright holder’s exclusive right of distribution,” wrote judge Neil Wake in an RIAA suit against Arizona resident Jeffrey Howell. Wake also ruled that simply offering to distribute music does not infringe on the copyright owner’s rights.

Last month, A federal district court judge sided with the record industry on the same issue. Judge Kenneth Karas in New York ruled that placing tracks in a shared folder can violate copyright law because such activity “constitutes publication and an offer to distribute.” The ruling allowed an RIAA suit against Denise Barker to go to trial.

Now the scorecard stands at 2 to 1, in favor of the P2P public.

Oddly enough, although it may be necessary to show that music was actually downloaded to prove piracy, it’s not necessary to show that any music was downloaded illegally. In many instances of alleged piracy, record industry agents are the people downloading the files. Defense lawyers argue that such downloads are authorized and legal — and therefore they don’t violate copyright law. But Wake in Arizona didn’t buy that argument, and said any downloading could be evidence of illegal distribution.

A spokesperson for the RIAA stated that the judge “got the issue right the first time.” They vowed to continue the fight, returning to court as needed. “This technicality does not change the overwhelming facts and evidence that ultimately proved Ms. Thomas’ liability,” the RIAA spokeswoman stated.

However, the case raises an interesting question — how does the RIAA determine liability in this instance? If they have not shown that any downloading occurred (or at most, that RIAA agents downloaded tracks) how can there be a determination of damages to the record labels? Seems that damages are determined by the volume of lost sales to the labels — which might be 99¢ per download. In this instance, Thomas allegedly made 24 tracks available on a shared file at Kazaa. A judgment of $220,000 ($9,166 per track) implies a lot of downloading.

Judge Davis might want to take a look at that penalty. I suspect the amount represents a punitive award rather than actual damages to any plaintiff. In fact, it’s easy to argue that the entire lawsuit has been punitive, because the RIAA’s strategy is not to recoup losses from pirated music, but to deter future, potential P2P downloaders by raising the fear of prosecution (and outrageous fines).

Meanwhile, judge Davis is considering the new trial. He has asked each side to submit additional briefs, and oral arguments will be heard July 1.

A reader and friend responded to a previous post of mine about the “democratization” of the recording industry. In particular he objected to technology advocates who support P2P sites’ attack on music labels. You can read his full comments, and my original article. Here are some excerpts that I find representative:

“Technology provided new consumer outlets, but never provided Label services like some would inappropriately claim. I knew the technology sites would one day have to pay to become “retail stores,” just as Napster was advocating at the time. But they were never trying to become “Record Labels.” Labels are banks who give artists money to record, tour, buy equipment, advertise, publicize, sell, distribute, hire attorneys, accountants, assistants and more, all of which are still needed, even with Internet “retail stores” like iTunes…”

“The notion of “democratization” as used by technologists toward music seems as absurd as when used by the Bush regime, and I find them similar. We live in a world, for better or worse, driven by “capitalization” which technologists seem hellbent to overthrow when practiced by the music industry. Yet, if the technologists do not ‘capitalize” their own companies and VC funding dries up, there is no “democratizing” technologists employed there any longer.

“I personally find P2P users bombing the legal music industry to be no different than Bush bombing with technology in illegal wars and using illegal wiretaps that overthrow even more rights guaranteed by the American Constitution. Those same “democratizing” technologists provide the wiretaps, provide the smart bombs, and agree with right-wing politics most of the time, as suggested in an article about Facebook published by The Guardian in which the author refers to those technologists as “neo-conservative libertarians.” Maybe you are one too? The last 8-years of all this bombing by Bush and his technology friends may have done more to overthrow Democratic Rights than to provide the “democratization” of anything.”

–David Bean, Digital Music Professional

As anyone who ever befriended a struggling artist, I’m sympathetic to the plight of musicians. I’m sympathetic with those trying to get recording contracts; and I’m sympathetic to those who have recording contracts and find their careers going nowhere.

But I have less sympathy for major record labels. First, I believe generally they are in the business of generating “stars” rather than promoting artists. To this end, they spend a huge amount of capital on “artist development” and then maximize their investments by focusing on highly-profitable performers while allowing the bulk of their portfolio to go unsupported. The result is homogenization and a dead-end career for many very talented artists.

But mostly, I believe major labels have become so entrenched in their money-making system that they are unable to accept and take advantage of the changing technology landscape to benefit their clients. Make no mistake, even if albums disappeared and the price of a song fell to 25¢, there are still profitable business models for artists and labels – but rather than adopt to these models, major labels find it easier to abuse their customers and their clients in order to squeeze out every penny. In this, major labels are serving shareholders rather than artists or consumers.

It’s also worth noting that the major benefits provided by labels (recording, booking, advertising, publicizing, selling, distributing) can all be done inexpensively with digital technology. And if labels didn’t reduce prices based on this technical windfall, they would be guilty of price gouging.

A recent article in Billboard Magazine spotlights Major Label’s attitude on the subject. Even though labels are exploring alternate business models, their support often comes at a hefty price for partners. Firms can be forced to pay higher upfront fees for licensing music, or in some cases (like that of MySpace Music) they must give up an equity stake in their companies. Would-be free music service SpiralFrog paid more than $3 million in upfront fees to UMG before even launching its service. Imeem paid up to $20 million in advance fees in addition to granting the labels equity. These draconian fees have been responsible for the death of innovative music services.

As for my friend’s claim that “technologists” are responsible for P2P copyright infringement, smart bombs and wiretaps, I find this unsupportable. For every smart bomb, there are 10 new antibiotics and vaccines; but somehow Pharmaceutical companies are seldom thought of as humanitarian. Likewise, agro-conglomerates breed superior crops that feed billions but have questionable business policies.

It seems there’s a disparity between a technology and it’s application. I would go so far as to say that technology is never moral or immoral, and that “technologists” are likewise morally indifferent. Morality is the purview of the user, and if P2P downloaders are cheating labels, then also labels are cheating music fans. Both have their respective consciences to deal with.

But at least it can be claimed that P2P downloaders did not start this fight. Downloaders use P2P because the cost of music has become prohibitively high. Most studies show that fans would gladly pay a fair price for a song in exchange for security, quality and convenience. But instead of trying to find an acceptable price-point, major labels squeeze their customers and make music even more expensive and inconvenient. Labels need to look to the future, and let cheaper track sales drive other revenues, including sales of merchandise, concert tickets, ringtones and free streaming video and audio supported by advertising.

Democracy is not the same as anarchy. It’s not individuals doing whatever they please – stealing whatever they can. In this case, Democracy is the popular enforcement of a just and equitable business model that treats artists and consumers fairly. And there are just and equitable music business models.

Democratization demands a heavy price. In the case of governments, it often subjects the minority to the will of the majority (or the apathetic to the determined). In the case of music, it’s a populist revolution. The business landscape has changed, and if the controlling regime won’t relinquish their old ways, it’s democracy’s right to overthrow the old regime in favor of the new. That’s what we’re seeing now.

At first YouTube complied, but Lenz argued back, saying that the song was an obvious case of fair use. YouTube agreed and re-posted the song. This is when the story gets fun…

The digital rights group Electronic Frontier Foundation supported YouTube in court. The case pivoted on when a copyright holder may legitimately complain about possible infringement.

EFF claimed that the use of the song in Lenz’s video was obviously fair use – and that the label’s demand to remove the song was essentially harassment. The specific law they cited was the Digital Millennium Copyright Act, which recently has defined copyright on the Web.

Not understanding that discretion is the better part of valor, Universal turned and counter-sued the EFF. The big label argued that its initial complaint to YouTube was in itself a form a free speech – and the EFF suit represented a breach of Universal’s first-amendment rights. (Universal argued that use of the song wasn’t “obviously” a fair use – so a suit was warranted.)

Federal district court judge Jeremy Fogel in San Jose heard the case, and essentially found against everyone. The EFF hadn’t completely proven that Lenz’s video was “obviously” fair use. And Universal hadn’t shown that any of it’s free speech rights had been violated. Fogel did, however, give the EFF an opportunity re-file the complaint with a better argument that the fair use of obvious.

Well this month the EFF is back with Fogel’s requested proof that Universal should have known that the video made fair use of the song. They’ve re-filed their complaint — that Universal knew or should have known it had no grounds to complain under the Digital Millennium Copyright Act. So now the drama continues.

So was Lenz’s use of the song “fair use”? According to US Copyright law, fair use is determined by four factors:

1. The purpose and character of the copy, including whether its purpose was purely commercial, or whether it’s intended for educational or artistic purposes.
2. The nature of the copyrighted work (which in this case is clearly a copyrighted work of music).
3. The amount and substantiality of the copied portion. In other words, did the copy steal all the best parts of the original?
4. The effect of the copy upon the potential market for the original work.

A cursory glimpse at Lenz’s video makes the argument pretty clear.

• The video was not intended for commercial purpose or to supersede the original. In fact the video furthers entertainment expression by use of the song – transforming it into a completely new work.
• The video uses only about 15 seconds of the overall work, which is about 5 minutes long. Longer 30-second clips of the song are ubiquitously available from other sources, including Universal.
• Because of the amateur quality and ambient noises, the video could never be reproduced or diminish the value of the original in any marketplace (actually, the song is barely audible).

In short – even Lenz’s 13-month old baby should have recognized the video’s use of the song is obviously within the fair use definition.

Meanwhile, Universal’s reaction is confusing. Surely they must realize the absurdity of their position. This suit is just one reason why music fans generally revile the Music Industry; why many major artists are defecting to their own indie labels; and why most Americans would rather illegally download songs than spend even 99¢ supporting this rancorous industry.

The survey is a listing of the world’s 100 most valuable brands, compiled by WPP Group’s Millward Brown unit. Brand rankings are determined by a combination of consumer perceptions, product performance, positioning and leadership. As it turns out, the most valued brands generally correspond to the most financially successful companies — and the best performance of publicly traded shares.

The relationship between brand value and business success is not as obvious as you might think. The Brand-Z study doesn’t take into account corporate performance when making the list. A brand is measured on less tangible qualities. What the study does show is that a well-positioned brand, innovative products, and successful public perception strongly impacts the success of a company’s stock price – especially during a recession.

The good news is for Google, whose estimated brand value rose 30% over the past year to $86.1 billion, making it the most valuable of the top 100 brands analyzed.

Rounding out the top 10 brands are:

* 2. General Electric: $71.3B
* 3. Microsoft: $70.8B
* 4. Coca-Cola: $58.2B
* 5. China Mobile: $57.2B
* 6. IBM: $55.3B
* 7. Apple: $55.2B
* 8. McDonalds: $49.4B
* 9. Nokia: $43.9B
* 10: Marlboro: $37.3B
You can get a copy of the entire list here.

In layman’s terms, brand measures the likelihood that a product will compare favorably against competitors if product details (such as feature set and pricing) were not a factor. It’s the reason why generic products are less popular, even though they’re often identical. It’s the reason why Coke sells better than Pepsi, even though blind taste tests show them to be largely indistinguishable.

In the coming years when corporate powerhouses begin to battle over emerging industries, you can bet highly ranked brands will succeed while others will be forced to reduce prices or bundle expensive features in order to build market share.

What this Says About the Mobile Web

In the emerging Mobile Web industry, mobile carriers, media companies, and Web businesses will all compete to be the gateway for mobile consumers. This is a space where no brands currently dominate – it’s essentially a level playing field. As mobile phones become better at browsing the Web, consumers will be asked to select products based only on their pre-existing brand equity.

In this instance, the top Web brands are poised to crush the competition on a global level. Google (#1), Microsoft (#3), Apple (#7) are tightly entrenched at the top of the Brand-Z survey, and they’re also among the fastest rising brands. Meanwhile second-tier web players like Amazon (#61), Yahoo! (#62), and eBay (#65) may find it hard to compete.

Mobile operators appear further down the list, but their presence includes some regional brands that are poised to dominate in their home markets. Vodafone (#11) and Verizon (#33) will compete globally – and so will likely get crushed by Google and Microsoft. Meanwhile China Mobile (#5), Japan’s NTT DoCoMo (#45), Spain’s Telefonica/Movistar (#88), and Russia’s MTS (#89) will be the strongest players in their respective markets – giving the global players a run for their money.

Interestingly, the media companies have almost no representation in the list. Only Disney appears at #23. Even the strongest media brands are absent, including MTV, CNN, Fox, BBC, etc. We can infer that these media brands will end up as a packaged feature on one of the Portals or Operators services.

Other Interesting Comments:

Technology brands dominate the list with 28 of the 100 brands. Brands in the category have increased $187B in value over the past year. This is more than half of the total growth for the entire list.

There’s a bifurcation between old and new Asia. Seven brands in the survey come from older, established Asian economies: Japan, Hong Kong, and Korea. But new Asian economies are gaining momentum, including four Chinese brands. Additionally, the Chinese brands saw an increase of 51% in value, based on only a 7% increase among the established economies.

Domestic brands are gaining ground on international brands – especially in emerging markets. Brands like Apple and Gucci, that have international prestige are growing at a slower or even being supplanted by new brands that dominate in their region. For example, China Construction bank and Bank of Chine are now threatening Wells Fargo, Bank of America, and Citi; and already have surpassed Deutche Bank and Chase.

To anyone moderately involved in the digital industry, these C-level comments are no surprise. As astonishing as the growth of Social Networks has been, their pitiful earnings have been equally stunning.

A few weeks ago, Wired’s Kevin Kelleher expressed the dilemma in terms of ad pricing. While robust in many online sectors, CPMs are trivial on the Social Nets.

Lookery, an ad network specializing in social media, offers display ads on MySpace, Facebook, and Bebo for only 13 cents per thousand times the ad is served (CPM); Yahoo’s average CPM is estimated at $13. Video ads on MySpace reportedly fetch just $25 per thousand showings; CBS charges $50 on affiliated sites, NBC as much as $75.

By my analysis, the Social Nets artificially inflate even these pitiful CPM figures. MySpace for example, has removed vast tracks of ads from it’s member profiles and other pages in an attempt to restrict inventory and buoy inventory prices.

Based on it’s current traffic, MySpace should be raking in $4.3 billion, but it’s minuscule $550 million in ad revenue last year didn’t even warrant a line item in the NewsCorp annual statement.

What’s the solution? MySpace may be rolling out its Music Service as a way to create higher-value ad inventory. It’s not a bad stop-gap strategy – but they have yet to come up with an idea to monetize their vast majority of current pageviews.

Facebook has launched the best effort so far — the Beacon social advertising platform. Members and privacy advocates simultaneously hated the idea. Wired’s analyst still mistakenly predicts that Social Advertising will be the ultimate solution…all evidence to the contrary. (I suppose in the absence of genuinely good ideas, you have to cling to the bad ideas or risk total despair.)

Social Networks Are Not Alone

Email is still the biggest online product in use today. Hotmail has about 220 million users. Yahoo! Mail has a reported 260 million users. But nobody talks about how widely profitable Yahoo! Mail is. Visit the site and you’ll see mostly unpaid house ads and low-CPM banners. Meanwhile, Yahoo! executives consistently tout display advertising, search monetization and media content as the company’s revenue drivers.

Some numbers: Assuming the average Yahoo! Mail user checks his email 15 times each month, and views an average of 5 ads, that would result in 19.5 billion ad impressions on Yahoo! Mail. It’s been reported that Yahoo! earns an average CPM of about $13 – applied to mail, that would result in $253.5 billion each month, or $760.5 billion quarterly.

Yahoo is reporting about $875 million in marketing services each quarter from it’s own site and properties. Assuming my conservative estimates, Mail would account for 86% of all of Yahoo’s onsite revenues. It would also exceed Yahoo’s offsite ad revenues by 26%. Clearly, mail isn’t earning Yahoo’s average CPM. More likely, Yahoo is receiving an average of $1 CPM for it’s mail inventory, or is artificially inflating CPM value by eliminating some of the inventory.

Five years ago, Instant Messaging was the hot communication application on the Web. But even at its peak, IM was never the revenue driver for either the market leaders, AOL or Microsoft. AOL bought ICQ in 1998 for $240 million in cash – but it didn’t recoup that expense through advertising. Instead AOL and Microsoft both viewed IM as a must-have utility for the success of their portal businesses – and they made money by driving their IM users to high-value pages like news, sports and entertainment.

Before IM there was chat – yet despite loads of low-value ad impressions, chat revenue never garnered headlines as a money-maker. Neither did message boards or news groups. In fact, it’s nearly impossible to find an example of a site that made significant revenues directly from any of these communication utilities.

Here’s my point, when the Social Networking bubble bursts, analysts will recognize Social Nets for what they are: a communications utility. They are a robust combo of mail, messaging, and personal profiles – innovative, but not earth-shaking. And these types of utilities have always underperformed as revenue generators. Instead, profitable businesses have historically used communications to attract users, who are then monetized via branded content franchises like news, sports and entertainment.

Where the Smart (and Not-So-Smart) Money Is

Analysts seem oblivious to historical truths. At WebProNews, Rich Ord has said “Social media is a different type of advertising platform from information-oriented websites and the two should not be compared.” I love this quote for its nostalgia value.

In 1999, respected analysts from the Wall Street Journal and BusinessWeek also justified ridiculous dot-com valuations based on the “potential” of Web audiences. When critics pointed out the failure of companies to monetize their traffic, the rallying cry was that web businesses were a different type of media company, and were not subject to traditional market valuations.

Now as then, common sense should rule… Is Facebook really worth more than Sun MicroSystems? Is MySpace worth more than Ford?

The assumption is that if users are worth money, then more users are worth more money. Theoretically, an infinite number of users are worth an infinite amount of money. It’s simply not true.

There is a point of diminishing returns in Web advertising. Enormous traffic creates a glut of inventory, which inevitably drives the value of ads down. The most highly valued inventory on the Web is branded, high-quality media content. It’s valuable because the content projects value onto the advertiser. When Target advertises on MTV.com, the brand benefits from MTV’s youth-oriented content, giving the brand a youthful shine. In contrast, utility inventory lacks the compelling context that advertisers need to help build identity and image, and in many cases may include negative images. The result is that advertisers have no cause to align their brands with products like Social Networks. Unlimited inventory and negative brand association is a perfect storm for low CPMs.

Social Networks mistakenly believe they can use more robust targeting to counter the lack of real content or context. Good luck to them. Assuming the practice can ever clear regulatory hurdles, all targeting will do is drive up the cost of keywords on AdSense – mediocre revenue gains limited to direct marketing. In the end, behavioral targeting will be a vast impressive technology, relegated to a bullet point on an ad network’s standard sales presentation.

In the meantime, Wired is still pronouncing, “the idea that ads can be a social experience is the industry’s best hope.” In my opinion, the best hope is to face the historical reality, and begin reshaping social networks as a traffic driver, rather than a revenue generator.

In my last article, I explored the feasibility of a streaming music service by MySpace. The conclusion is that MySpace definitely has the traffic and ad inventory to make the business profitable. Unfortunately MySpace also has some financial problems that make the business not quite so cut-n-dry.

(This is part 2 of my 2-part series on MySpace and ad-supported music services. Read part 1 here.)

Let’s do some math:

MySpace’s overall advertising revenues in the United States reached approximately $525 million in 2007. But in the same period, MySpace served about 40 Billion monthly pageviews. Assuming that each page has space for 5 ads, that’s about 2.4 trillion ad impressions for the year. Assuming a conservative CPM of $2, MySpace should have made $4.8 billion in advertising.

Based on MySpace’s reported revenues, their actual CPM is $.24. But that’s not accurate either. Most of MySpace’s revenues comes indirectly, such as through their Google search relationship. In reality, MySpace rates have been reported to hover around $.01 CPM.

Why did MySpace fall short more than $4 billion in ad revenues last year, and why is their CPM 1/200th of what it should be?

Lots of reasons, but mostly because there’s little demand for advertising on MySpace — or on Social Networks in general. Advertisers are shy about appearing in the pages next to content that is often inflammatory, inappropriate, or just plain stupid. Add to that the enormous glut of inventory (2.4 trillion impressions!) and the net result is lots of traffic that can’t be monetized.

MySpace should acknowledge that it’s member profiles are basically not monetizable. Their revised strategy should then be to leverage the profiles as a means to drive members to high-value services.

The ability to sell ads on Social Networks has become such an glaring problem that Google openly acknowledged in it’s January earnings call that they have been unable to figure out how to monetize traffic on social networks.

MySpace didn’t earn $4.8 billion last year because they didn’t serve 2.4 trillion ads. In fact, they eliminated a huge portion of their advertising inventory. If you go to MySpace today, you’ll likely find page after page where all ads have been removed. If they hadn’t, they would have seen the value of the company’s advertising deflate to almost nothing, destroying their hopes for profitability.

Is Music the Solution?

MySpace has the potential to generate sufficient revenue to cover the cost of music streaming, plus some. But the question is, is there enough demand for MySpace inventory? If the demand is low, MySpace will either have to eat the cost of their streamed music, or try to push more inventory on the site, further devaluing their CPMs.

What’s the solution for MySpace? Oddly enough, the music service could hold a key to fixing the social network.

Member profiles on MySpace will always be difficult to monetize because of the unpredictable nature of the content. The solution is for MySpace to abandon its ad inventory on member pages, and create new pages where the content is predictable, desirable and “professional.”

The key here is the content, which is the most valuable branding tool. Say what you like about Web 2.0; but high-quality, professional content still brings in the ad revenues.

Music is a prime example. Pepsi had Michael Jackson; Chevy had Toby Keith. Brands have been trying to associate themselves with music since the early days of sponsor-supported radio.

What’s It Look Like?

MySpace should acknowledge that it’s member profiles are basically not monetizable. Their revised strategy should then be to leverage the profiles as a means to drive members to high-value services — such as personalized radio. These extra services can then be monetized, rather than the profiles. Profiles would still have value as a way to build data on users, to target ads on other services.

I envision a MySpace music service on a separate interface, popped-up from a member profile, but viewed independent of the profile. The separate music interface would benefit in three ways: 1) The page would be separated from any content that runs contrary to the advertiser’s identity. 2) The advertising could be targeted to the specific music, and thus to particular demographic & psychographic audiences. 3) The advertising could also leverage the specific interest-based data pulled from the originating profile, such as age, location, favorite products, or hobbies.

The profiles then are left completely personal, without intrusive ads. This would make users happy — and improve MySpace’s image. The new service pages would contain highly targeted ads, which would benefit from improved sell-through rate and higher CPMs.

Monetizing The Music

The ability to place ads within the music service adjacent to specific artists would bring exponential value to MySpace’s business.

If MySpace were clever, they would allow advertisers to bid for popular artists, in the same way Google advertisers bid for keywords. Some popular artists might fetch CPMs of $50. Following the 80/20 rule, 80% of requested songs would be from the highest-priced 20% of artists. That actually allows MySpace to maximize profitability, because the highest CPMs are claimed by the most often-requested songs.

Of course lesser-known artists could be bought at a discount, but still hold real value for specific businesses. Imagine a Jamaican resort buying placement along the entire catalog of Jimmy Cliff or Bob Marley. Because the ads are highly targeted, there is little downside risk for small advertisers to buy into the long-tail of music.

It’s not easy to predict just how much revenue could be generated by this strategy shift. Certainly MySpace traffic metrics would see a lift as more members stay on the site longer, streaming music. If we assume that 2% of MySpace’s current 1 billion monthly sessions use the product; that would generate about 100 million additional ad impressions. Using the $2 CPM number, that’s about $4.8 million annually. Not a lot of revenue in the grand scheme.

But the real benefit for MySpace is that it could stabilize the demand and value of MySpace’s ad business overall. This is something the site sorely needs today.

Bill Houghton is a 13 year veteran of new media business and product strategy, having developed strategies for AOL Music, Moviefone, AOL Entertainment, and MyStrands.com. His latest efforts focus on media discovery via social networks, and business models to assist independent artists. Read more from Bill at www.BroodingSavage.com.

MySpace is now the latest company trying to distribute free ad-supported music. Good luck to them!

This article is part 1 in a 2-part series on MySpace and the feasibility of Ad-Supported Music Services.

Several companies, including LastFM and Imeem, are attempting to build ad-supported music services. I’m a fan of most of these, especially for the service they provide for independent artists. But lets be clear about one thing… these companies are not offering “free music.” They’re offering free on-demand radio. There’s a big distinction.

SpiralFrog and Qtrax are building a reputation for delivering free, downloaded tracks, with the cost recouped through advertising revenues. I’ve had some previous thoughts on the subject. It would take more than traditional ad revenues to support the cost of music given the price points set by labels.

But the MySpace story is different, and raises two questions. Can MySpace actually provide even a streaming service supported by advertising when great services like Pandora and Live365 have stumbled. And even if MySpace can, who cares?

Part 1: Who Cares?

Does anybody really want on-demand radio? Well, yes and no. There has been some small-scale successes in online radio, but no major revolutions. LastFM and Pandora continue to be niche services that are successful during working hours, while people are at their desks.

But let’s be realistic — music needs to be both portable and collectable. Everyone I have ever known has a music collection. Music is an intrinsic component of each individual’s personality. Streamed tracks can’t fill this basic quality.

A music collection is like an expression of a person’s unique identity. Over the years, it becomes an archive of who we have been throughout our lives. I still remember my first album – A Wizard/A True Star by Todd Rundgren. It was a gift when I was 10, and when I lost it moving between dorms in college, I replaced that long-outdated work with the same album on CD. Why? Because like most people, I consider music to be the historical artifacts of my life.

So let’s not kid ourselves. Being able to stream free songs on-demand via a website is not an innovation. For many people, it’s not even a product.

Part 2: Financing on-demand radio

As you might imagine, the difference in the cost of broadcasting a song on-demand and downloading the same song is striking.

The RIAA recently increased the fee for online broadcasts to $.0019 per performance of a song. Compare this with an estimated $.75 that labels are receiving from iTunes for a download.

Now I know broadcast music licenses are a complicated business, and the fee structures are never as simple as they appear. No doubt News Corp has been negotiating the finer points of their deal directly with labels, and we have no way of knowing what the final number is. But regardless, the big picture is clear… streaming a song is relatively cheap compared to downloading.

Can MySpace recoup 1/5th of a penny for every song streamed on their site? Simple math shows that a CPM of $2 would reap $.0020 per ad. MySpace likely demands a CPM higher than $2, and they can place 5 ads on a page. If a song lasts 5 minutes, the page can be refreshed multiple times, effectively quadrupling the potential revenue. So in short, MySpace definitely has the traffic and the inventory to make the music service profitable. Unfortunately, it’s not so simple.

Part 3: The Problem with Social Networks

MySpace’s overall advertising revenues in the U.S. reached approximately $525 million in 2007. That’s a phenomenal increase from the $190 million earned in 2006. Clearly MySpace is in the best possible position to try an ad-supported service, like music streaming.

But in the same period, MySpace served about 40 Billion monthly pageviews. I’ve seen as many as 5 ads per page, that’s about 2.4 trillion ad impressions for the year. Assuming a current CPM of $2, MySpace should have made $4.8 billion in advertising.

What’s causing the shortfall? Find out tomorrow. I’ll be analyzing MySpace’s revenue problems in the next installment of this article….

Bill Houghton is a 13 year veteran of new media business and product strategy, having developed strategies for AOL Music, Moviefone, AOL Entertainment, and MyStrands.com. His latest efforts focus on media discovery via social networks, and business models to assist independent artists. Read more from Bill at www.BroodingSavage.com.