The recording industry has been grappling with how to monetize peer-to-peer (P2P) file sharing activity on the Internet for some time now  and lately the major labels seem to be in agreement that the best way to make money through the digital distribution of music might be to give it away for free. Yes, that’s right, free is the new paid,according to Kenneth Parks, chief operating officer of Brilliant Technologies, a company based on New York and Melbourne, that is developing a service called Qtrax, which will provide free music  legally  to Internet users. That is, as long as they’re prepared to view advertisements with their music.

The idea of free, ad-supported content is hardly new. That’s been the revenue model in television and radio for decades. However, to get the major record labels to agree, that giving away their music to consumers is a good idea, is nothing less than radical. As everyone knows, since the early days of Napster, the major labels have tried in vain to plug the flow of file sharing, leaving a trail of disgruntled fans and decreased revenues. Rather than trying to adapt their business models to the new realities and opportunities presented by the Internet, the major labels have tried to reinvent golden oldie concepts by setting up online record shops and celestial juke boxes. Over-playing their copyright hands, the major record labels have doubled-down on strategies that have alienated an entire generation of younger music consumers. Then came the backlash, inevitably, where artists in particular spoke up, to protest that the labels had made victims of their fans. It was only a matter of time before the record labels came to realize that it would be futile, in the end, to make the Internet conform to their old-fashioned business methods, and that the labels themselves would have to be the ones to adapt.

The New York Times reports on April 23, 2007, that several start-up companies are pursuing the idea of advertising-supported music, including Qtrax, which plans to open for business in September. Qtrax already has inked deals to distribute ad-laden P2P distributed music from Warner Music GroupEMI Group, and Sony BMG Music Entertainment. Qtrax is said to be in negotiations with the last of the big-four, Universal Music Group, at the present time.  Qtrax and its CEO, Allan Klepfisz, have been biding their time for the last four and a half years, hoping eventually to succeed through co-operation rather than confrontation. According to the New York Times, here’s how it works:

From the user’s perspective, Qtrax works much like any file-sharing program, and it will search the Gnutella network. But Qtrax will only display files that it has permission to play, then bring up relevant advertising, much as Google does for search terms. Although advertisers will not be able to have their messages appear with the name of only one particular artist, Mr. Klepfisz said that they would be able to buy bucketsof a particular genre. Listeners will be able to hear songs a certain number of times €” probably five in the case of most major label acts.

If listeners like what they hear, they will be able to purchase those songs, much as they can on iTunes. Initially, those sales could generate more revenue than advertising, Mr. White [senior vice president, Strategy and Product Development for Warner] said.

Over the long term, however, Qtrax plans to make most of its money selling advertising. Our challenge is to demonstrate that ad-supported peer-to-peer is lucrative enough that everyone is going to be happy,Mr. Klepfisz said. The real issue for the industry is that right now there are all these people paying nothing for music.

At first, Qtrax will have a revenue-sharing arrangement with labels. Eventually, though, it will have to pay the labels a royalty for each time a user plays a song, which could cost quite a bit relative to ad sales.

The tipping point that seems elusive to determine, however, is at what point, the ad revenue share will be replaced by a song-by-song royalty  if ever. In the past, major labels have given the cold shoulder to suitors who were proposing to allow the labels a profit-share of their own product. Since most recording artist agreements allow the labels considerable latitude to give away free product as promotional tools, and bucketsof ad-laden music could be devilishly difficult for labels to track for royalty purposes, perhaps the major labels could be coming around to finding this type of offer seductive after all.

Societies interested in the streaming of musical compositions embodied in masters, such as SOCANASCAPBMI, etc. already have complex methods to sort-through buckets of works; and mechanical rights agencies dealing with the reproduction of musical compositions embodied in masters, such as CMRRAHarry Fox, etc., seem able to handle bulk licensing from their vast catalogues, but the record labels which control more specific catalogues of works, with varying marketing priorities, are more likely to cling to the mindset of performing their royalty accounting by trying to follow the distribution path of each track.

P2P-distributed content (currently of the outlaw variety) vastly outstrips traffic from sites like iTunes, to the point where it’s known to be warping the shape of Internet traffic globally. With the current boom in Internet advertising revenues, why should the labels rush to empty their ad-laden buckets?