Something Important Is On The Horizon In The Music Business

Having ceded the file based music opportunity (mp3s and drm’d file formats) to Apple (AAPL), the recorded labels are now getting hip to the much bigger opportunity: Streaming music.

Yes, it’s true that listeners will still want to own files for a few more years. There are places and devices that can’t get high bandwidth wireless Internet access, like my macbook pro which I am writing this on the plane ride home to NYC. I am listening to mp3s (no drm for me) in iTunes all the way home.

But over the next five years, the number of places and devices where you can’t get a speedy wireless connection is going to dwindle to maybe the car. And you’ve always got radio in the car, which is going to get better and better because it has to in order to survive.

Like everything that has happened in digital music, the rights holders have been once again been forced into dealing with an emerging technology. Companies like last.fm and iMeem and others have done deals over the past year with the leading rights holders to give them permission to stream pretty much any song they want to listeners over the Internet. They can do this “on-demand”, meaning you want to listen to the new Jack Johnson song, you tell your favorite web music service that and it plays. They can also stream music in various forms of smart playlists, either the tracks you have marked as your favorites, or the tracks your friends have suggested to you, or the tracks that people who like the same music as you like. Each and every service has a different take on these playlists. I happen to like last.fm and hypemachine. You may like Pandora. Someone else might like Jango. Your kid’s MySpace page might have an iMeem playlist on it.

And because of all this innovation in streaming music over the past year, the number of people actively listening to music streamed over the Internet is rising quickly. It’s becoming a mainstream activity, particularly among the younger set.

I think of these web services as the new radio stations. Everyone of my generation has had their favorite radio stations. Everyone of my kid’s generation will have their favorite web music services. There will be hundreds of them. All supported by advertising, just like traditional radio stations, and all of them licensed by rights holders (eventually), and all of them paying the rights holders a little coin every time their song is played. And because these services will be free to anyone who wants to listen, they will be very popular. Never before have you been able to decide you want to listen to something you don’t currently own and then just play it. No searching on Limewire or bittorrent, no waiting for the download, you type in the name of the song you want to play and you hit play.

These services are coming to mobile phones, probably in the next year we’ll all be listening to pandora or last.fm in the gym on our phone instead of our limited library on our iPod. That’s when this new form of listening is going to explode. And that’s when Apple is going to wish it had thought more about streaming and less about file based music. But you can’t feel too badly about Apple, because a good number of people will be listening to Pandora or last.fm on their iPhones.

Two things happened this past week that may be important to this emerging market. First, MySpace got in the game. They cut deals with most of the major labels to allow them to offer their own streaming service. It’s MySpace, and as Bob Lefsetz points out, they have their own set of challenges with technology and user experience. But music is a HUGE part of the MySpace experience and they have over 100 million people a month coming to MySpace, often for music, and that’s a much bigger audience than anyone else has for a streaming service. And they’ve been in the business of streaming for a long time, not in a particularly easy to use way, but they play a lot of music to a lot of people every day. So I think MySpace will be a meaningful player in the emerging streaming music business.

The other thing that happened is Ian Rogers left Yahoo Music, where he had been leading the charge for the past couple years and joined a small startup in LA that has some ideas about this emerging market. Ian is a super smart guy, one of the few people I’ve met in the web music business who really gets where this is all going.

What Ian knows is that the fans are the most powerful distribution points for music. He gets the power of mp3 blogging. He understands that the Hype Machine has built a terrific new age radio station by aggregating all the music that is being posted onto mp3 blogs and he understands that further enabling that kind of behavior, where the fans are the ultimate arbiters of what gets played and what gets popular, is the end game for all of this.

I don’t know much about what the company Ian joined does. And I haven’t been told about any of their plans. So this is all just conjecture on my part. But watch what they are going to do closely. I think something important may come of out that development.

Here’s what we need. We need someone to create an easy to search streamable library of all the recorded music in the world. We need to be able to grab a track and embed it on our blog. We need to be able to see how many people played it. We need others to be able to crawl these user pages with the embedded music and create algorithms based on who posted it, how often it was played, and how often it was reblogged and linked to. The services that do all of that need to be able to play the music that flows out of these social algorithms in the same way. This all has to be licensed and legal and it has to result in money flowing to the artists. If you put the music on your blog, you should have two choices. Allow the ads to be served into your music or your page or both by the service you got the music from. Or deal with the monetization yourself and pay the royalties you owe. Most people will do the former but some will do that latter.

When this platform is built and served up, a million flowers will bloom. Everyone who wants to be a radio station will be one. And it will be simple to do it. And it will be legal. And we’ll be able to listen in our homes on our home stereos, at the gym, at work, at the library, and some day in the car.

That’s the future of the music business. And we’ve made a lot of progress in the past year getting there. I am excited as a fan, a listener, a technogeek, and an investor.

SAI contributor Fred Wilson is a partner at Union Square Ventures. He writes the influential A VC. Please comment below or on the original post.