Business models jostle for space in digital revolution

As digital continues its march on the music industry, a series of different business models have emerged that the labels hope will wean pirates away from filesharing and help send profits soaring.

The history of digital music stretches back to 1991, when the Fraunhofer Institute invented the MP3 file compression format, with the first portable player emerging seven years later.

Yet it was Apple, with the launch of the iPod in 2002, followed by iTunes a year later, that drove the musical revolution online. When iTunes launched in the UK in 2004, it quickly became the digital download retailer of choice, helping send Westlife to the first digital number one with Flying Without Wings.

Dan Cryan, a senior analyst at Screen Digest, said: "Retail is an easy model to engage with, and iTunes has replicated that effectively. It is a model that works for many consumers."

He estimates that the service accounts for between 60 per cent and 70 per cent of online sales in the UK. Competitors in the UK include Amazon and HMV, as well as 7digital, which HMV bought a share in last year. Others include Tesco Digital, Bleep and Ministry of Sound.

Yet, filesharers have not been keen to pay out for their music when they can get it for free, so other models have sprung up, such as what Mr Cryan calls the "radio-style model" of Last.fm. More notable, he said, is the "access model" with companies including Spotify and We7 offering ad-funded music streaming.

Figures from the BPI, the music industry trade body, showed that ad supported services, which also include YouTube, have lifted their revenues to £8.2m, but despite being the largest increase of any sector of the market, they remain less than 1 per cent of the year's total revenues.

"Piracy has got rid of the scarcity value of music, so these services are now about providing people access to music on the devices they want, when they want it," Mr Cryan said. "There are positive signs but it is not there yet."

For those who do not want the adverts, Spotify also offers a premium service for £9.99 a month. Revenues for that, along with other subscription services, such as eMusic, BT Vision and Napster, last year hit £11.8m, a growth of 37.2 per cent.

The mobile phone industry has also looked to bundle in music, such as Nokia's Comes With Music package, Omnifone's MusicStation and Orange's Monkey. Yet the BPI found that revenues from mobiles fell 13.3 per cent over the course of the year to £12.7m.