CNBC Business | On the right track?

On the right track?

Barry Mansfield talks to Steve Purdham, CEO of We7, about the future of free music downloads

The music industry, as we know it, is in dire straits. Figures from the International Federation of the Phonographic Industry (IFPI) show that total UK CD album sales declined by 10% in 2007 alone, with similar declines posted worldwide. An impressive 40% growth in digital revenues, which now stand at €1.86bn, has failed to offset a continued slump in CD sales and the effects of piracy. The “big four” labels – Sony/BMG, Warner Music, EMI and Universal – have all shed staff in a desperate bid to cut costs. In June last year, British discount CD chain Fopp went out of business after 25 years, and in September Sir Richard Branson offloaded 125 high street Virgin Megastore outlets to a management buyout group.

There could be light on the horizon though. A startup called We7 is offering legitimate, ad-attached music downloads completely free of charge from its website. Instead of charging consumers to download tracks, We7 sells a 10-second advertising space that appears at the beginning of each download. The cost to the advertiser is between €0.40 and €0.90 per download, with a cut of the advertising revenue shared with those music companies that license their music for use. In April, Sony BMG was the first of the big four to sign a licensing deal to allow free streaming of its back catalogue from the site, joining independents like Sanctuary Records, V2 and Nettwerk, meaning We7 now offers over 800,000 tracks.

We7 was launched in April last year by Steve Purdham, a Cheshire businessman who is well accustomed to fighting copyright thieves – his last big venture, web security company SurfControl, was sold to Silicon Valley giant Websense for €260m a week before We7’s launch. “People hate advertising, but they like free,” Purdham says. That’s why We7, in an unusual twist to digital rights management (DRM), has developed a mechanism that enables it to entirely remove the 10-second adverts after a month, or after several plays by the subscriber.

The foundations of the idea were laid when ex-DJ Purdham was considering an investment in music download company OD2, owned by ex-Genesis frontman Peter Gabriel. He eventually teamed up with Gabriel and British venture capital veteran John Taysom. In January 2008, the site received €3.9 million in Series A funding from this trio, with Spark Ventures and Eden Ventures also injecting cash.

Purdham jokes that if it doesn’t all work according to plan, then at least they will still have the fag packet, beer mat and serviette that they first jotted their ideas down on. His credentials in this field are strong, however; one of SurfControl’s most popular features was a filter that prevented internet users from downloading MP3s and video files. But the fact that Purdham has a history of fighting the corner for content providers is just a coincidence, he says.

In the continuing battle between rights holders and a generation used to consuming everything they need on the internet at no expense, We7 may have identified a politically sensitive middle ground. The straight-talking Purdham isn't having any of that, though. "You can get bogged down in the philosophical debates," he says. "The reality is that the internet is brilliant for allowing the consumer to try what works and what doesn't work. It's got nothing to do with politics. It's all about what's easiest for the consumer."

The music industry’s nightmare began in the late 1990s with its failure to embrace the potential of peer-to-peer (P2P) file sharing sites like Napster, says Purdham. "The industry went to war with its customers,” he sighs. “In a world where people want music than ever before, we're finding that digital music sales are going down the pan. But, everybody should be optimistic. The first thing you want is for the market to be growing. So it's not a DRM versus MP3 debate.”

DRM’s purpose was usually to monitor and track recorded music and copy protect it, but in practice this often means that you have to buy multiple copies of the same content to use on different commercial devices. “DRM didn’t give people the flexibility to play a track on their iPod, their Zune or Archos player, and in their car. While the industry was saying 'How can I stop people copying our music?' the rest of the world was saying 'How do I consume music?'”

We7’s growth comes at a time when governments and big business are teaming up to formulate a plan of action to fight copyright thieves and illegal P2P downloaders. For example, Japan's Agency for Cultural Affairs wants to force MP3-player manufacturers to pay a royalty charge to copyright holders that may have lost out as a result of illegally recorded content. In the UK, some internet service providers (ISPs), including Telefonica subsidiary Be There, explicitly forbid the improper use of P2P in their terms and conditions, while in the US Warner Music has hired former Geffen Records boss Jim Griffin to lobby for an ISP tax that could see consumers paying an additional fee – maybe $5 a month – bundled into their monthly internet-access bill.

While the proposed ISP tax has many fans among the music establishment – Nine Inch Nails frontman Trent Reznor has voiced his support – the plans haven’t gone down so well with consumers. One blogger on Broadband Reports described it as “little more than a glorified protection racket, where the music industry gets $20 billion in annual revenue in exchange for not suing ISPs or individuals.” Another poster complains that “this so called tax money is not going directly to the artists.”

We7, on the other hand, seems to have been well received in the blogosphere. In the IsoHunt forums, blogger OG admits he’d “rather go through a 10-second ad than pay $9000 per illegally obtained music track to the likes of the RIAA [Recording Industry Association of America].” He also points out that a string of successful prosecutions in the US indicate that the lawsuit culture will permeate elsewhere. In May, for example, one file sharer from Linköping in Sweden received a €5,900 fine and a suspended prison sentence for uploading music and movies. OG believes: “We7 is a realistic model, if people realise that the something for nothing culture is unsustainable.”

Whether Purdham’s high hopes for We7 can be realised depends on how successful he is in attracting new advertisers and satisfying existing ones. “They’ll need convincing, so We7 must ensure the ads are closely targeted,” says Mathijs van Abbe of internet advertising consultancy Toading. “The bigger the track catalogue, the more they have to expand their stable of advertisers to keep up, and vice versa. It’s a tough balancing act, and they’ll burn cash very quickly.” For the time being - until We7 has built up stronger momentum - users can only remove ads from 20 tracks per month.

And We7 is entering a highly competitive download market. Apple’s ITunes boasts 4bn downloads since its 2001 launch. Second place in the league of digital delivery taken by eMusic, which has 200m downloads with a userbase of 400,000. But since We7’s music is not yet available to American users, Purdham is bullish about the future: “We've already got 130,000 users and we don't have that much music yet.”

He faces competition from US site Imeem, which already boasts a Royal Flush of deals with the big four, and 25 million visitors per month. However, Imeem doesn't provide a “download” button, and not all users will like its social networking-style environment. Their appeal to different user groups could mean that there is enough space for Last.fm, eMusic, Imeem and We7 to co-exist.

“Wherever you want to listen to music but don't want to pay for it, I'd love see a We7 head and logo on there, so you can click and listen to the music that's paid for by somebody else,” says Purdham. “We're a long way from it now. But I believe we can get there.”