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As it turned out, Qtrax had a few contractual and licensing issues to sort out before it could go live, but in the meantime, music fans could console themselves with a new offering from Last.fm. With the agreement of the major record labels, the British-based music site began streaming full-length songs free of charge, with users allowed up to three listens. As with the business model posited by Qtrax, record labels and artists were paid from advertising revenues.

At first glance, this seems like a textbook example of record companies giving away the crown jewels, or at the very least wilfully breaking the psychological link between the consumption of music and payment. But the truth is that the internet has forced the industry to rethink its business models. CD sales are down and while the download market is growing, legitimate transactions are still outstripped by illegal file sharing. As Fiona Meldrum of brand consultancy Sparkler puts it: "There is a whole generation of young people who don't understand the concept of paying for music."

That's not universally true, of course. In your local branch of HMV or Virgin, money continues to change hands. Meanwhile, iTunes has sold something in the region of three billion songs since its launch and the all-you-can-eat monthly subscription service offered by Napster currently attracts 750,000 worldwide users. Nevertheless, Guilio Brunini, chief executive of BrandAmp, a communications strategy consultancy specialising in the interface between music and advertisers, says the industry has been forced to consider ways and means to monetise those consumers who crave music but who don't want to pay. "Record companies have realised that consumer behaviour is changing," he says. "And if they are to continue to be successful they have to adapt to the demands of consumers."

Content deals

Hence the apparent willingness of major labels to consider licensing content to ad-funded services. It's by no means a brand-new concept. In the US, Spiralfrog boasts a free download catalogue of about 800,000 songs, while Britain's WE7 - a venture specialising in indie labels and unsigned acts - has recently passed the two million download milestone. But to date, the reach of these services has been limited by their catalogues. A store along the lines of Qtrax would be a much bigger proposition than Spiralfrog and potentially generate much greater amounts of advertising revenue.

And, according to James Bates, director of media at Deloitte, scale is all important if ad-funded download sites are to fulfil their potential. "Qtrax says it has 25 million songs. If that's the case, good luck to them because the first hurdle for any new entrant into the music download market is legal access to a large library and quality content," he says.

However, as the on/off launch of Qtrax illustrates, licensing agreements aren't always forthcoming and Bates believes that the Last.fm model is probably more attractive to the industry than the Qtrax vision. "Last.fm has a large user base and the on-demand service has a strong promotional element," he says. "Those who use the site can listen in full three times but are then directed to other sites such as iTunes to make a purchase." In other words, the labels not only receive ad revenue but also have the potential to make a sale.

Also attractive is the prospect of repeat revenue. Consumers must return to the Last.fm site if they are to listen again, providing an opportunity to serve more ads. "When someone buys a CD or purchases a download, they pay once and that's it," says the company's head of communications, Christian Ward. "With our model, the label and the artist get paid every time someone listens to the song."

Brand opportunities

Music sites share the ability of social networks to build communities and target tightly defined groups of consumers. According to Steve Purdham, chief executive of WE7, his company's experience suggests that any commercial messages can have a real impact. "We offer display ads that have an average dwell time of ten seconds," he says. "But we can also add audio ads to the beginning of tracks and they remain in place for a month after download. Even with a distinctly non-mainstream catalogue, it's a proposition that has already attracted advertisers such as Microsoft and Virgin Wines.

There is, of course, the question of whether consumers will find ads intrusive. Meldrum believes that is a danger but adds that if the medium is used creatively, advertising and marketing activity centred around downloads could hugely enhance the ability of brands to engage with consumers.

"The opportunity is there for brands to become patrons of music," she says. They can become associated with the provision of music." Brunini agrees, and - citing Nokia's offer of a year's free downloads to phone buyers - he argues this is already happening. "Nokia is playing a key role in enabling access to music on the move," he says.

So does all this point to a day when no one will pay directly for music? Thorsten Schliesche, vice-president of sales and marketing for download pioneer Napster, thinks not. "We offer an a la carte download, a subscription service and in the US we have an ad-funded model," he says. "The ad-funded model is very hard to get right and we strongly believe that subscription is the way forward."

For the moment at least, no one is expecting ad-funded models to carry all before them. For one thing, not all genres sit easily with the demands of advertisers and the inevitable licensing restrictions will not suit every consumer.

"I don't think any model will dominate," says Bates. "It's a case of horses for courses."

- See Live Nation feature, p30.