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Is MySpace Music An Antitrust Lawsuit Waiting To Happen?

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The billboards are up, the CEO search continues, and MySpace Music is set to launch sometime next week. It would have launched last week, but protracted negotiations with EMI to bring it aboard along with the other three music labels is believed to be the cause of the delay. If MySpace Music can launch with EMI it will overnight become a major new force for music distribution on the Web. That is because it will offer free streams of full-length tracks from all the major labels, legitimizing the advertising-supported model that is beginning to challenge iTunes’ pay-per-download approach. It will be more akin to a subscription model like Rhapsody’s, but without the subscription.

MySpace won’t be the first service to offer free ad-supported streams from all the major labels (imeem already does so, and even Rhapsody itself is moving towards a hybrid model that combines free-streaming, an MP3 store, and subscriptions). But it could be the first to run into serious antitrust issues.

Independent labels are already crying foul for being “blocked” from the service. The indies will likely be added over time. The bigger antitrust issue comes down to the pricing relationship between MySpace and the music labels. MySpace will have to be extra careful about how it structures its relationship with the music labels. MySpace Music is a joint venture between three of the four major music labels and is currently raising more capital at a $2 billion valuation. If EMI joins, it will probably want an equity stake as well.

It is not clear how MySpace Music will be paying the labels. But by giving them a financial stake in the business, MySpace Music has a chance of throwing out the current, problematic digital music business model. The problem with advertising-supported streams is that every music service on the Internet has to pay the labels about a penny per streamed song, which is the equivalent of a $10 CPM and is uneconomical.

The big unanswered question is whether MySpace Music will play by these same broken rules or whether it has convinced the labels to lower their prices (or simply accept a share of MySpace Music’s revenues). The music industry desperately needs a new digital business model. There is no question about that. But if the labels are going to allow MySpace Music to pay less per stream or not at all, and they themselves are joint venture partners in MySpace Music, that will open them up to charges of preferential pricing, collusion, and price discrimination. (The music industry’s own hush-hush TotalMusic project could run into the same issues).

So MySpace Music and the music labels might find themselves in a pickle. However, there is a solution that will help not only MySpace Music sidestep the antitrust pitfalls, but could also spark a whole new wave of growth in the entire digital music industry.

It’s simple really. The music labels should reset the rules by repricing the cost per song they charge to every music site on the Web. Whatever price MySpace Music is paying should be the price for all players. (A $1 effective CPM would make more sense). That might weaken MySpace Music’s competitive advantage, but getting clobbered by an antitrust lawsuit would be worse. And you know what they say about bigger pies.

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