The 20-person New York-based company has signed a deal with record label Universal Music Group to offer songs for free, hoping to make money by showing ads to users as they download the music.
"Essentially they are paying with their time," said Lance Ford, the company's chief sales and marketing officer. SpiralFrog hopes to begin running the service in December, offering downloads in the Windows Media Audio format. The downloads could be played on the PC or transferred to a portable device, though notably not Apple Computer's iPod.
Although billed by some as an iTunes competitor, SpiralFrog's idea is more like subscription services such as Napster or MTV's Urge. Users are required to go to the company's Web site each month to validate their music, or else it expires.
This is not the first time that a record label has dipped its toe into offering music that is paid for through advertising revenue. Earlier this month, EMI announced a deal with start-up Qtrax, which is also looking to provide free, ad-supported music.
EMI spokesman Adam Grossberg said the label has been experimenting with a number of different business models, including several advertising-backed music and video services. "Ad-supported delivery of music...provides EMI with a potentially viable new source of revenue," Grossberg said. EMI has also been in talks with SpiralFrog.
Universal would not comment publicly on its deal with SpiralFrog.
However, a source familiar with the agreement said the record label received an upfront payment, in addition to a share of the advertising revenue generated by the service. Universal's deal with SpiralFrog is initially for just one year, though Universal may look to extend it if it proves viable.
Battling back after years of Internet-fueled file sharing, record companies are looking for business models that offer them revenue for their music. Meanwhile, more and more content-based companies are starting with the hope that widespread availability of high-speed Internet access will mean that more and more dollars will shift from traditional media to the Web.
"In the future, you are going to see this as a new advertising model for the Internet as advertisers desperately chase this elusive bunch of teenagers and 20-somethings," Ford said. The company's challenge is to both attract advertisers and get enough people to spend time on the site to make it pay off.
Ford said the company knows it needs to build a site that can keep users "occupied and entertained," but said that the more time spent on the site, the more music that people can download. "We think that it should be pretty compelling for both music aficionados as well as casual fans."
SpiralFrog said it has raised north of $10 million, though Ford would not say exactly how much the company has raised or which investors provided the funding. He said the company is in talks with other record labels as well. "They see money coming from us they wouldn't be able to get."