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Free music downloads could come with a price: advertising

Momentum is building for online music companies that are looking to tap into ad-based Internet music downloads.

Here's a new way to download hit singles over the Internet without paying a dime: give up a corner of your computer screen to advertising.

That deal would probably be pretty unappealing to MP3 veterans racking up free music collections over file-swapping services such as Napster. But it doesn't sound so crazy to record executives

Dataquest analyst Sujata Ramnarayan says free content is more attractive than any payment plan, so demand for advertising-supported music will increase faster than demand for subscription services.

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scrambling to find profits in the swelling online music trade.

"Consumers are generally pretty wary of limits on the use of content once they have it in their hands," Jupiter Communications analyst Aram Sinnreich said. "But this is definitely worth a try as far as the (intellectual property rights holders) are concerned because they have to find a way to make money on digital distribution."

EverAd, a start-up founded in Israel two years ago on the strength of technology for delivering banner ads along with downloads, is going after this market. The company is slowly gathering momentum, signing up about a dozen Internet music sites to distribute its content, along with 60 independent record labels and about 40 paid advertisers.

Today, online music site joined EverAd's partnership list as it searches for potential revenue streams, giving EverAd a broad new platform for its proprietary PlayJ format.

Although advertising may appear to be a long shot for music downloads, Web companies are ready to try almost any experiment to squeeze cash out of online music, which has not sold well. When Hewlett-Packard agreed to pay online music retailer EMusic $3 million in a cross-marketing deal, the sum exceeded the aggregate sales of all music downloads, according to Sinnreich.

Many analysts believe that subscription services, in which record labels give unlimited access to content for a set rate, offer the best hope for a sustainable business model for music on the Internet. For example, Sony Music Entertainment and Seagram's Universal Music Group in May unveiled plans to launch a joint subscription service, although both also plan to test consumer appetite for pay-per-download services. Sony currently offers about 50 titles for $3.49 each on its Web site. Universal says it will offer downloads for sale sometime this summer.

In the meantime, music Web sites and record labels aren't ready to write off other strategies.

"I think long term, the bargain of free music supported by advertising is one that consumers will accept," said Brian Gonick, EverAd vice president of business development. "Subscriptions will be a component, but ultimately it will be about giving consumers a choice. They will be able to decide whether they want to pay full freight or get a discount in exchange for carrying some advertising."

EverAd's encryption technology places restrictions on the use of downloaded music files so they can be played only by accepting a feed of banner advertisements. The company's PlayJ technology places a security envelope around popular compression formats such as MP3.

The ads shut off with the music and do not run when other formats are played.

The company offers a free plug-in that worksNapster wildfire with Microsoft's Windows Media player and America Online subsidiary Nullsoft's Winamp player. Gonick said a plug-in for RealNetworks' RealPlayer will be available in the future.

EverAd collects consumer data, although Gonick said the company does not create identifiable profiles of individuals.

A privately held company with headquarters in New York City, EverAd received a $22 million investment in February, Gonick said. "Nobody is doing what we're doing," he said.

While Gonick said the company's digital rights management format is unique, Jupiter's Sinnreich downplayed the company's technology advantage.

"The technology is trivial," he said. "The hard part comes with the consumer."