Why MySpace Music Is Likely to Fail

[qi:004] MySpace Music, a new music service plotted by MySpace and music labels, is likely to debut soon with much pomp and show. And despite all the pre-buildup hype it is by no means a slam dunk.

Earlier Sunday it was reported that the company is looking to raise about $100 million on a whopping valuation of $2 billion. Nevertheless, the names — Fox, Sony BMG, Universal Music Group Warner Music — involved in the project are going to draw comparisons with another service, Hulu, which had raised a similar amount at a $1 billion valuation, even without a name. [digg=http://digg.com/tech_news/Why_MySpace_Music_is_Likely_to_Fail]

Why a company needs to raise hundreds of millions of dollars in order to fund itself is hard to fathom — after all this very same company has multimillion-dollar advertising deals with some major brands including McDonalds, State Farm and Toyota. Perhaps raising money is necessary because there is no hope for this joint venture to turn a profit.

Why can’t its corporate backers, News Corp., and all the record labels who own a piece of this company pony up the dollars themselves? Or do their non-actions speak for their relative faith in the prospects of the project? Of course, if I was them, I would not put my own cash in a company that has failed to hire a chief executive, though it has been a few months since the service was first announced in April 2008. Can’t they convince anyone to take on this mission impossible?

The reason I call it mission impossible is because I think the labels and MySpace are trying to win yesterday’s war. The service, which will sell DRM-free downloads, is going to face many well-entrenched competitors — Apple being the biggest. MySpace Mobile downloads are going to be powered by Amazon, and I am sure that they will take their fair share of the download sales.

MySpace Music also wants to make money selling concert tickets, ringtones and other merchandise — another business where competition is fierce. Their other revenue stream is from ad-supported music streams — not an easy business, because they need to have millions of people streaming tunes all day long in order to rack up sizable revenues. And even then, revenues don’t necessarily assure profits. Given how poorly other ad-supported services have done, there are questions about this service. One way to make money would be for record labels to cut artists out of their share of the sales.

The record labels are still not facing the proverbial music and understanding that their business model is completely broken, including the licensing end of the game. They need to learn that they don’t need to start a company, but instead encourage a thousand others. Record labels need to focus on what they know: finding talent, making them stars and putting their current cost structure on an anorexic’s diet.

There is an air of desperation around this venture. MySpace needs to ensure that Facebook doesn’t eat its lunch, as it starts to trail in raw number of users. On the revenue side of things, MySpace is beginning to sputter. In June, Michael Nathanson, an analyst with Sanford C. Bernstein & Co., told The New York Times, “The jury’s still out on MySpace’s ability to monetize…We don’t have much conviction in the long-term ability to grow this business based on what we’ve seen lately.”

The record industry has shrunk by about a third in past five years — mostly because of the incompetence of the guys who run the business. They fought the technology and now are coming to play at a time when the other team has hit the showers.

Before I go: Shouldn’t this so called company — a cartel really — get a closer look from the Justice Department? After all, three record labels who own 70 percent of the music business will own a major part of this company. How is that kosher?