Free music downloads get Universal blessing

A start-up hailing from the Big Apple is touting a free music downloads business model that record companies can buy into.

The 20-person start-up, SpiralFrog, has signed a deal with record label Universal Music Group to offer songs for free, aiming to make money by showing ads to users as they download the music.

Lance Ford, the company's chief sales and marketing officer, said: "Essentially they are paying with their time." SpiralFrog hopes to begin running the service in December, offering downloads in the Windows Media Audio format. The downloads could be played on the PC or transferred to a portable device, though notably not Apple's iPod.

Although billed by some as an iTunes competitor, SpiralFrog's idea is more akin to subscription services such as MTV's Urge or Napster. Users are required to go to the company's website each month to validate their music, or else it expires.

This is not the first time a record label has dipped its toe into offering music that is paid for through advertising revenue. Earlier this month, EMI announced a deal with start-up Qtrax, which is also looking to provide free, ad-supported music.

An EMI spokesman said the label has been experimenting with a number of different business models, including several advertising-backed music and video services. He said: "Ad-supported delivery of music... provides EMI with a potentially viable new source of revenue." EMI has also been in talks with SpiralFrog.

Universal would not comment publicly on its deal with SpiralFrog.

However, a source familiar with the agreement said the record label received an upfront payment, in addition to a share of the advertising revenue generated by the service. Universal's deal with SpiralFrog is initially for just one year, though Universal may look to extend it if it proves viable.

Battling back after years of internet-fuelled file sharing, record companies are looking for business models that offer them revenue for their music. Meanwhile, more and more content-based companies are starting with the hope that widespread availability of high-speed internet access will mean more and more dollars will shift from traditional media to the web.

Ford said: "In the future, you are going to see this as a new advertising model for the internet as advertisers desperately chase this elusive bunch of teenagers and 20-somethings." The company's challenge is to both attract advertisers and get enough people to spend time on the site to make it pay off.

Ford said the company knows it needs to build a site that can keep users "occupied and entertained" but said the more time spent on the site, the more music people can download. "We think that it should be pretty compelling for both music aficionados as well as casual fans," he added.

SpiralFrog said it has raised in excess of $10m, though Ford would not say exactly how much the company has raised or which investors provided the funding. He said the company is in talks with other record labels as well. "They see money coming from us they wouldn't be able to get."

Ina Fried writes for CNET News.com