Music service We7 hits milestone as ads cover streaming costs for the first time

Peter Gabriel's star may have waned since the days that he fronted Genesis, but the online music service he helped to set up – We7 – hopes to show the way for the industry in the digital age.

We7 said yesterday it had raised enough money from advertising last month to fully cover the costs of streaming music for the first time.

The company's chief executive, Steve Purdham, called the achievement a "major milestone". We7 competes with rival streaming services such as Spotify and was set up in 2007 by Gabriel and Mr Purdham with Gareth Reakes and John Taysom. Users can browse through five million songs on the website's so-called "cloud-based jukebox", which attracts three million users a month and makes money from adverts before songs and on its site.

In a statement, We7 said it was "the first company to demonstrate that the music on-demand, ad-funded model can work in the mainstream market, and that each song can be paid for at a fair and reasonable rate".

Although it does not yet make enough to cover its full operating costs, We7 said it is was bringing in sufficient advertising to cover the fees payable to performers and songwriters, and the costs of internet bandwidth.

Mr Purdham said: "The business is all about scaling up at the moment. If the moment continues as it has done so far, we will hit profits by the end of the year."

One million plays of a song on We7 generate between £2,000 to £4,000 for the music industry. Mr Purdham said: "It was critical to ensure that the rights owners and songwriters get paid a fair rate whilst stamping-out piracy. Now that we have achieved this momentous milestone, we feel confident about increasing scale."

Music labels have struggled against online music pirates and are backing streaming services in the hope they will wean computer users off the illegal sharing of files. Many file-sharing services, including Spiralfrog and Ruckus, have subsequently collapsed.

Mr Purdham said: "Music matters and should have a value. Just because music is free for the consumer does not mean it shouldn't be paid for."

The British Phonographic Institute reported this week that UK sales of recorded music grew last year for the first time in six years, with revenues up 1.4 per cent to £928.8m. Download sales rose more than 50 per to £154m.