PARIS (Reuters) - Digital music services battling to build a serious business out of selling tracks online need to embrace social media, smartphones and emerging markets, two of the most successful companies told the Reuters Media and Technology Summit.
Despite numerous attempts and the continued popularity of music, few start-ups have managed to succeed in launching new services as they struggled to secure the support of the record labels and compete with the might of Apple's (AAPL.O) iTunes.
But more than 10 years in, groups such as the music discovery specialist Shazam and music services Rhapsody, Spotify and Pandora have become well established by delivering tunes to more consumers around the world and helping to grow revenues for the once-wary labels.
Telecom operators which can hide the cost of the music in their monthly contract fee and social networks which can raise awareness to millions of people are key. Tapping emerging markets can also prove fruitful.
"I think for younger music consumers it's not about ownership any more: it's about access to 16, 20 million tracks," said Will Mills, Shazam's director of music and content. "Then it's about social curation to try to work out what you want to listen to.
"If you make it frictionless and priced right people will buy music still."
The music industry has been criticized in the past for focusing too much on fighting piracy and failing to develop new online services that can attract consumers.
While Apple's (AAPL.O) iTunes dominates the market, consumers often buy single tracks rather than albums.
In response, the industry is now expanding its horizons with more players and a push into subscription services where fans pay a monthly fee to access millions of songs. Including that fee in a mobile phone bill can help drive sales while also increasing customer loyalty for the operator.
French music streaming company Deezer is growing globally using a partnership with Facebook and deals with telecom operators to encourage people to discover music through their networks of friends and listen to it via phones and computers.
Chief Executive Axel Dauchez said one important issue was the need to teach people that they could access the music offline on their phones without running up huge data bills. "If you reach that point there is no more need for ownership," he said.
Deezer offers a limited free service in France, its biggest market, but outside the country its streaming services, which are targeted at smartphone users, generally carry a monthly fee.
Dauchez said the labels' attitude changed after they realized streaming services were a new source of revenue. "It is now much easier (dealing with labels)," he said.
Streaming also has huge potential. He said an average of two CDs were bought per household in 2000 In France, whereas a subscriber to its streaming service generated 10 euros a month.
Independent music industry analyst Mark Mulligan said major labels welcomed streaming services, but their enthusiasm was not shared by independent labels and some artists, who were not seeing much return.
"Something in the region of 130-140 streams is equivalent to one download (in returns)," he said. "It looks better if you're a record label because you aggregate everything, but if you're an artist and you're swopping one download for 20 plays you are looking at a massive drop in your income."
But he said the opposing argument said the number of people downloading music was quite small so streaming could be one way of getting everyone else involved with digital music.
"The theory is things will essentially right themselves over a period of years as more people move into the consumption paradigm, because ultimately it's a scale game," he said.
The industry has also woken up to the potential of services like Shazam, a smartphone app that recognizes and identifies tracks.
It has attracted more than 200 million users, who tag more than 7 million songs each day. Users can then click through to Shazam's partner sites to buy the song.
"Eight percent go on to buy a track, that's primarily an a-la-carte download from the big players in the space," Mills said. "It drives more than $100 million of music sales a year.
"We have deals with a lot of record labels around the world," he said. "A very big track, such as Goyte's 'Somebody That I Used to Know' will get more than 1.5 million tags a week, which nets out to sales of 120,000."
Shazam is bolstering its strong position in music by agreeing deals with broadcasters and advertisers to enable consumers to tag adverts or programs during major events such as the Super Bowl, enabling program makers to directly interact with consumers.
Other opportunities include selling tickets to live music. "It's not just about selling units anymore, it's about maximizing the value around the whole music experience," he said.
Mills said the labels were now much more open to working with a range of new business models.
"Five years ago they were very much about wanting to get very large advances, but now they want to innovate, (they) throw as much against the wall as they can and see what sticks," he said.
Deezer has a tie-up with France Telecom FTE.PA, helping it reach 1.4 million paid subscribers in the country.
Dauchez said it had taken time to establish the right model in working with telcos. "Now there is a specific know-how at every level to make sure it works," he said.
The ability to reach millions of people through social networks and to provide music through smartphones means those who have got it right are starting to feel more optimistic about the future.
"We are coming out of the trough now," said Mills.
Editing by David Cowell