The Wall Street Journal reported today that Google was preparing to add a new feature to its Chinese search site: users would be able download and keep legal versions of the songs they search for, free of charge. If Google wins support from all the major record companies (only Universal Music Group has signed on so far, according to the Journal, and Silicon Valley Insider questioned even UMG's participation), it will have pushed the music industry closer than it's ever been before to a model that depends on advertisers, not consumers, to pay the freight.
One problem for advertiser-supported music ventures, such as the semi-launched Qtrax and SpiralFrog, is the high cost of making labels happy. The record companies typically charge online music businesses on a sliding scale, depending on the degree to which the service might crater CD purchases. On-demand listening (i.e., streaming songs from an online jukebox) runs about a penny a play; burnable downloads go for about 70 cents a track. To cover the latter rate, a service provider would have to saturate users with ads or persuade advertisers to pay an unusually high CPM.
Of course, Google's search advertising system prints money. So if anybody's capable of creating a successful advertiser-supported music system, Google would be that entity. Beyond that, legitimate music sales in China are minimal, so the labels don't have to worry about cannibalizing revenue streams in that country. Just about anything they get from a partnership with Google would be incremental.
The unusual nature of China's market makes it less likely that the venture would blaze the trail for a new business model globally. The hunger for free music, however, knows no geographic boundaries. The reported Google approach seems elegantly simple -- it would use free music to help sell ads, then split the proceeds with the copyright owners. The fact that the labels are even considering it shows how far they've moved from earlier this decade, when executives disdained free downloads because they supposedly reduced the perceived value of music. The $17.6 billion question is whether the labels will scale their license fees to match what advertisers are willing to pay. The killer ad-supported model might be one that generates a lot of revenue despite low per-track fees by moving a huge number of songs -- some multiple of what Apple sells on iTunes. That's just a guess. What's certain is that as rampant online piracy drives the price of songs to zero, record companies have to find ways to monetize the activity that surrounds the enjoyment of music -- finding, downloading, sharing, etc. Google in China could provide some good clues, but it's just a place to start.