Making music free (and legal)

Imeem announced that it has inked deals with all four major record labels in less than six months.

NEW YORK (CNNMoney.com) -- In the space of six months, startup social networking music site imeem has soared to the top of the charts.

The Web site, which lets users listen to and share their favorite music online, announced Monday that it signed a deal to access the catalog of Universal Music Group. That makes imeem the first site to offer free unlimited songs and music videos from all four major record labels.

Imeem's Universal agreement follows similar deals with Warner Music Group (Charts), Sony (Charts) BMG and EMI earlier this year.

Universal, which is owned by French media giant Vivendi (Charts), is the largest record label worldwide, and is home to artists such as Eminem, Elton John and Gwen Stefani.

Imeem allows people to stream, but not download, an unlimited number of songs and videos and makes money by selling advertising. It shares ad revenues with its label partners.

The music industry has been wary of advertising-supported business models because labels can't make nearly as much per song from advertising as they can through selling digital downloads.

As recently as July, imeem didn't have a single deal with the major labels -- all it had was a major label lawsuit.

Warner Music filed suit against the site in May 2007 for copyright infringement, alleging that it had used content without permission, and seeking up to $150,000 per song or video in violation.

But in July, Warner dropped its suit and signed on as the first major label to work with imeem since the site started in October 2004.

"We really worked to show the labels that they can benefit from an ad-supported music world combined with social networking," said Steve Jang, imeem's chief marketing officer. "Their marketing people have worked with us to promote artists, so they were already excited about how we present their content."

Universal has been experimenting with many different ways of spreading its music in the digital world, said Forrester analyst James McQuivey.

Universal's CEO, Doug Morris, said in a press release that the key to the deal was the site's good user experience combined with the way that it fairly paid the label's artists.

Imeem's CEO, Dalton Caldwell, has argued that the record industry needs to let go of the notion that music should be the main revenue driver and instead focus on an advertising-based model like radio and television do.

"Look at the media industry, especially newspapers. Many publishers are opening up their sites to get more traffic. You have to think of music labels as another kind of media company. They need more openness and an ad-supported business model," Caldwell told CNNMoney.com in October.

Imeem applies many of the features of Google (Charts, Fortune 500)-owned YouTube to digital music, letting people listen to and share their favorite songs.

"2008 is going to be the year of music labels trying to put themselves in front of everyone, no matter what business model it takes," said Forrester's McQuivey. "The labels have realized that you have to be everywhere on the Web, because the customer is everywhere. You need to put yourself in front of them when they make their entertainment decisions."

McQuivey said that imeem has a big head start compared to other social networking sites, Although large sites like MySpace and Facebook could definitely elbow in with major label deals of their own.

"The great thing about imeem is that it builds on the best of radio and MP3," said McQuivey. "This is a great place to listen to your favorite music and discover new songs."

And even though imeem is not nearly as large as other social networks -- it had 3.3 million unique visitors in October compared to 72 million for News Corp.'s (Charts) MySpace, according to figures from comScore -- imeem is growing rapidly.

It currently has 18 million active users, and was the fastest-growing social networking site between October 2006 and October 2007, according to comScore, with unique visitors soaring 712 percent.

One of imeem's biggest challenges is that you can't download any of its music - but the site does include links to both Apple's (Charts, Fortune 500) iTunes and Amazon.com (Charts, Fortune 500) if users want to purchase tracks..

Imeem's most direct competitors offer limited free access to music. Ad-supported SpiralFrog lets users download free tracks from two major labels - Universal and EMI - but songs can't be played on iPods or Microsoft's (Charts, Fortune 500) Zune.

Rhapsody, from RealNetworks (Charts), has content from all four major labels and offers a free, ad-supported version, which lets users stream only 25 songs per month. Subscribers have to pay for unlimited music. Other services, like Napster, also offer flat-rate subscription models.