EMI's Digital Decision

As the one-year anniversary of the Grokster decision rolls around, music companies are still looking for ways to make money through digital music.

Witness music big EMI Group, which has struck a deal to offer its catalog online. London-based EMI says it is the first major music company to make its catalog available via what will be the "world's first advertising-supported, legal peer-to-peer music distribution service."

For this new advertising effort, EMI has signed a licensing deal with Qtrax. Qtrax was developed by New York e-commerce software maker LTDnetwork. Revenue will be split fifty-fifty between the two sides. Advertising is likely to come in the form of voice, Internet banners, video and other mediums.

The music industry has suffered greatly at the hands of file-sharing pirates. But services like Napster(NAPS Quote), once a source of countless losses, now sell music legally.

Yet piracy concerns persist in the minds of investors. The International Federation of Phonogram and Videogram Producers, which represents the industry, says that at the end of 2005 there were 335 legal file downloading sites, up from 50 in the previous year.

And while physical music sales declines continue to bewilder investors, sales via the Internet and other platforms kicked in $1.1 billion in 2005, up nearly threefold from the previous year. For its part, EMI says that digital sales in publishing and music hit $211.2 million for its full calendar year, up from $88.4 million.

Indeed, digital sales are now largely mitigating physical declines, though online sales still make up a smallish fraction of total revenue. At Sony BMG, for example, digital sales in the U.S. are said to now make up 14% of total sales. Warner Music Group's(WMG Quote) digital sales are in the high single digits as a fraction of total sales.