Hey iTunes, here comes Google Music, Spotify

Google is getting closer to debuting a music service, according to multiple music industry sources who spoke to CNET on condition of anonymity.

Google Music could launch as soon as next month, wrote Brad Stone of BusinessWeek in a story last week. My music industry sources say, however, that it is highly unlikely for Google Music to debut that soon and predicted that because Google still has to negotiate some very complex licensing agreements, it will take months rather than weeks for the service to get off the ground.

Another holdup is that each record company has a different view of how a cloud music service should work.

Last year, when word leaked that Google planned on a music service, record industry sources said Google managers were telling the labels they hoped to launch sometime in the fall. Then, that date got pushed back to the end of the year. Google still doesn't have all the licenses it needs and negotiations continue. The search engine appears to have been overly optimistic about how fast it could create a cloud-music service, tie it together with YouTube's music videos as well as Google's mighty search engine, and wrap up licensing deals with the labels.

The big record companies have never licensed a cloud-music service like the one Google has proposed and agreements had to be created from scratch, according to record industry insiders. Google has spoken to the labels about offering a service that would sell downloads as well as offer streaming subscriptions.

Nobody is more thrilled about Google's entry into digital-music distribution than the four largest record companies. Google's music service will debut against a backdrop of tumbling of sales, layoffs, CD-plant closures, and declining consumer interest in downloads.

Google jams
The top labels haven't seen a player of Google's stature ride into the sector on the back of a popular consumer-electronic device (Android-powered phones) since Apple did it with the iPod. Google has the kind of marketing muscle and deep pockets to challenge iTunes' grip on digital music sales. In addition, Google owns YouTube, which has become one of the most popular music venues online. As a genre, music videos are the most popular fare on the Google-owned site.

The timing looks right to challenge Apple's iTunes. While iTunes is still the music industry's Michael Jordan, the service increasingly looks more like the slower, pudgier Jordan of the Washington Wizards era.

An Apple spokesman declined to comment for this story. Google did not respond to an interview request.

The iTunes download store still accounts for more than 70 percent of all online song sales worldwide, but as iTunes has matured, the software has become bloated. Some users complain that iTunes slows down their computer's performance and it's been awhile since iTunes, as a music service, generated much excitement. Two of the biggest iTunes announcements regarding music lately have been the sale of Beatles music and the addition of longer song samples--respectable updates to be sure, but hardly enough to lift the service's long-term prospects.

What's troubling those in the music sector is that digital song sales are flat. Digital sales were supposed to record double-digit growth for years to come if you listened to past predictions by analysts.

Exactly what is causing the slowdown is unclear. Some, including research firm NPD Group, have speculated that ad-supported services that offer music for free to consumers, such as YouTube's music videos, compete with iTunes, Amazon, and other services that try to sell songs. These services, however, don't have a history of generating profits. The labels have an extensive history now with ad-supported services and as a sector it's been a disaster.

SpiralFrog, Imeem, Ruckus, and YouTube have all attempted this business model and only YouTube has anything to show for it. While YouTube and Imeem were able to attract significant audiences, Imeem was unable to generate much money. The company closed down as did SpiralFrog and Ruckus.

Spotify's transatlantic troubles
It is this dismal record that has created havoc for Spotify, the European streaming-music service, said the music-industry sources. The company has failed to acquire U.S. licenses from the major record companies for more than a year despite attracting 10 million users in Europe. One of the biggest obstacles to convincing the labels that Spotify is a winner is the service's troubles to convince users of its ad-supported service to dip into their wallets and pay for the company's subscription offering.

Nonetheless, Spotify has finally cut its first licensing deal and is closing in on another. According to a report in The New York Post, the company has reached an agreement with Sony Music Entertainment, the second largest of the top four record companies. The music service, founded by Swedish entrepreneur Daniel Ek, has also made progress with EMI, the smallest of the major labels, according to a report that appeared Friday in The New York Times.

To get this far, Spotify has had to pay dearly, the music industry sources said. Besides making some major financial concessions that the company refused to give in on last year, Spotify has also agreed during talks with the record companies to limit the amount of free music it will offer, the sources said. At this point, it looks like music fans in this country will get a watered-down version of the much heralded European offering.

"More speculation," said Jim Butcher, a Spotify spokesman. "We cannot comment on negotiations and will not give any detail on the U.S. service until we're ready to launch."

Expect big-label critics from the tech sector to howl. They will argue that at a time when all the traditional distribution models appear to be dying, they should be embracing new, experimental business models. But label hardliners say that they've been down that road with sites that give away songs for free and they haven't worked. The labels will undoubtedly try again and will license Spotify, but they will want big upfront money and limits on free music to help hedge their bets.

Meanwhile, Apple also spoke to the big recording companies about an iTunes streaming service that would enable users to store their songs on Apple's servers and access them from one of Apple's Web-connected devices, say music executives.

Apple hasn't done a lot of talking to the labels about the cloud-music service in a while, the sources said, but they added that before the top labels give in to Spotify or other new ad-supported services, they first want to play these Apple and Google cards.