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Grooveshark: the other free music service

October 10, 2011 |  5:02 pm

Grooveshark screen grab

This post has been corrected, as indicated below.

The "freemium" business model may be taking off among online music services, but the conventional wisdom is that Spotify and other proponents will never make money off of their free, advertiser-supported tiers. Instead, the key will be hooking people with the free offering, then persuading them to pay for an upgraded tier.

Spotify's newly released financial statements seem to back up that view. As the company grew in 2010, so did its losses.

Don't tell Paul Geller that free music on demand is a money-loser, however. Geller is vice president of business development at Grooveshark, an advertiser-supported site based in Gainesville, Fla., that streams an unlimited amount of music on demand to users at no charge. Grooveshark has been rocking the freemium model for longer than Spotify -- in addition to its free tier, it has a $6-a-month advertising-free plan and a $9-a-month service that works on modified smartphones (more on that later). But Geller is bullish about the site's potential to generate enough ad dollars to be profitable, even after paying royalties (more on that later too).

That's largely because of the data generated by Grooveshark users. By analyzing that data, Geller said, the company can target ads much better than other sites (as demonstrated by higher click-through rates), pair artists with brand advertisers in mutually advantageous ways, and help labels market artists far more effectively.

Some bands might balk at the idea of their songs promoting corporate America's products. But Geller said that in Grooveshark's approach, "the brand is the one endorsing the artist. It's almost exactly opposite of the artist selling out." For example, MSN wanted to do some advertising tied to the South by Southwest music festival. It wound up paying for a space on the site that ran short videos of artists saying who they wanted to see perform at the show. Bands weren't singing the praises of MSN; instead, MSN was associating itself with the bands' praise of other artists.

When I hear a company talk about being able to target ads more effectively, I automatically worry about the privacy implications. For the record, Grooveshark's privacy policy says the site never releases personally identifiable information to third parties. And Geller asserted that data about what a user has played in the past, which some users might view as particularly sensitive, isn't useful to advertisers anyway. They're interested in what's hot now, not what was trendy a month ago.

The biggest problem for Grooveshark is copyrights. The company has a licensing deal with numerous independent labels -- Geller said it has been signing about 10 deals per month with indies, some big aggregators -- but only one of the major record companies. That's EMI, which licensed Grooveshark in 2009 only after settling a lawsuit it had brought against the company. Shortly thereafter, Universal Music Group sued Grooveshark in New York, and this year a group of songwriters and music publishers sued the company in Nashville.

Because of this litigation, Google and Apple have removed the Grooveshark mobile app from their markets. As a consequence, those who want Grooveshark's mobile service have to hack their smartphones to make the app work.

There's plenty of music available on Grooveshark that the company hasn't licensed. The question is who, if anyone, is liable. Grooveshark argues that it provides a platform for users to upload and share music, and it admonishes them not to violate copyrights. Unlike YouTube, however, it doesn't check each upload to see whether it's been cleared with the copyright owner. Instead, it relies on labels and publishers to send takedown notices, which Geller said the company responds to with unusual alacrity.

That's consistent with the 1998 federal law that provides a safe harbor against infringement claims for user-generated content sites. But Universal is suing Grooveshark for violating New York's common-law copyright protection with respect to tracks recorded before 1972, when Congress provided national copyrights for recorded music.

Geller said Grooveshark wants to sign licensing deals with all the labels. Whether the labels are eager to sign with Grooveshark is another question. The company's free tier competes with the freemium strategies pursued by the likes of Spotify, MOG, Rdio and Slacker, which diminishes their ability to make money and pay royalties. But as much as they may prefer models that encourage people to pay for online music services, the labels need a free alternative that can make money, Geller argued. That's because there is a large audience of music fans who simply won't pay to listen to recorded music, at least not online. Some have no ability to pay -- they don't have credit cards. Some have no interest in doing so. And there are numerous unauthorized sources of free music online that generate no money at all for labels or artists. "How are you going to do away with piracy," Geller said, "if it's not free, fast and worldwide?"

That's not a bad argument. The question, again, is how to serve those users without undermining rival services that charge for music. If Grooveshark generated the same kind of revenue per user from its free tier that its competitors did from their paid services, I suspect that the legal troubles would go away. The fact that Universal and the music publishers are still suing the company suggests that those plaintiffs, at least, aren't convinced that Grooveshark ever will.

[For the record, 9:15 a.m. Oct. 11: The original version of this post misspelled the last name of Grooveshark's vice president of business development, identifying him as Paul Gellar. The correct spelling is Geller.]


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-- Jon Healey

Healey writes editorials for The Times' Opinion Manufacturing Division. Follow him @jcahealey.