Imagine a service that provides instant downloads of popular music, like Apple's iTunes, but without the 99-cent-per-song fees. That's precisely the surprise gift Google delivered to its Chinese users this week.
With online music store Top100.cn, Google China unveiled a music-search service that will ultimately make millions of songs from 140 record labels available for download free of charge. Among the music giants turning over their valuable tracks to the new service are Sony Music Entertainment, EMI, Warner Music Group and Vivendi SA's Universal Music.
Western music fans may be tempted to view Google's Chinese experiment as a sign of things to come in the US and Europe. But the vast difference between the paid-music market dynamics in China and the rest of the world suggest record labels won't agree to export the free download service any time soon.
The Google China-Top100.cn service will make money by selling advertising next to music listings delivered to users searching for particular artists, albums or songs. The resulting revenue will be split between Google, Top100.cn and the record label partners. Top100.cn chief executive Gary Chen told The Wall Street Journal that he hopes the service will grow to $14.6 million within the next few years.
The music industry's decision to turn over their catalogs in exchange for a share of such a measly new revenue stream illustrates the desperation of record labels in China, says Sonal Gandhi, a music and media analyst with Forrester Research in New York.
"The labels are making essentially no money from their music in China because people downloaded illegally with impunity,'' Gandhi says.
Music downloading is prevalent in China--70 per cent of the nation's 300 million Web users download songs--and overwhelmingly illegal. The International Federation of the Phonographic Industry claims that 99 per cent of Chinese music downloads are not sanctioned by record labels. Partially due to piracy, China's entire recorded music industry books just $86 million in annual revenue, compared with $10 billion for the US.
The IFPI is suing Google's main Chinese rival, Baidu, for providing links to file-sharing sites that facilitate illegal downloading. The music trade group won a similar lawsuit against Yahoo! China in 2007.
The US market for digital music is not so bleak. While illegal downloading, particularly over peer-to-peer file-sharing services such BitTorrent, cuts into music sales, new digital business models have emerged to partially replace those losses.
Digital stores such as iTunes sold 1.1 billion single tracks and 66 million albums in the US last year, according to Nielsen Soundscan. Paid subscription streaming services like Napster and Rhapsody garner another $250 million. The music industry will he hesitant to go along with a downloading service that provides a free substitute to those emerging revenue streams, Forrester's Gandhi says.
If Google wanted to launch a product similar to its Chinese music service in the US, it is unlikely the music industry would license its catalog for a price that would allow the search giant to make money delivering music. It is also possible that Google would operate the Chinese service as a loss leader to win traffic from Baidu, which controls 62 per cent of the search market to Google's 28 per cent share.
There is some precedent for American media start-ups trying the free download model. Spiral Frog, an ad-supported free download service, went bust earlier this month, reportedly due to massive licensing costs paid to labels coupled with a shortage of ad sales.
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