Today MySpace is launching a new online music service that it hopes can chip away at iTunes’ dominance in the music retail market. The new initiative from MySpace has the backing of all four of the major music labels. MySpace users, which number over 120 million worldwide, have previously been able to go to the MySpace page of their favorite artists and and stream a few pre-selected songs. The new service, however, will allow users to freely stream songs from a much larger catalog of music with the option to then purchase them from Amazon. Users will also be able to create playlists and share them with their online friends.

The Economics of MySpace Music

The site will be supported through advertisements, with big names like McDonalds and Toyota already on board. But will MySpace be able to make any money off of this venture? According to a few sources, the record companies will be charging MySpace 1 cent for each streamed song. So if a user streams 100 songs, MySpace will owe one dollar, and to make that money back, it will have to charge advertisers 1 dollar for every 100 page impressions (which is obviously 10 dollars for every 1000 page impressions). This is significant because it has been noted that MySpace, in the past, has only been able to charge advertisers 3 dollars for every 1000 page impression

Moreover, MySpace was only able to entice the big four record companies (Sony BMG Music, Universal, Warner Music, and EMI) to sign on board after offering them each an equity stake in the project, along with a cut of the ad revenue that the site generates. Under such an agreement, it seems that there are too many pieces of the pie to be shared to allow any one party to make any significant amount of money through advertisements – but making money via ads might not actually be the primary goal for the companies involved.

The Apple Model

Keep in mind that Apple has sold over five billion songs through iTunes, yet it barely breaks even with the service. Rather, Apple makes money via the iTunes storewhen consumers purchase iPods to listen to their downloaded iTunes tracks. Similarly, its entirely possible that MySpace and the record labels have larger and more profitable objectives in mind as they prepare to launch the new site.

What MySpace is hoping for

MySpace would delight in anything that keeps users on the website for as long as possible. Even more appealing, yet further down the road, is the idea that MySpace will be able to parlay their new music service into other related streams of revenue such as t-shirt and concert ticket sales. MySpace might be banking on their new service evolving from a streaming music site into a one stop, full service music resource center for consumers.

What the record labels are hoping for

And as for the record labels, they really have nothing to lose and everything to gain with this partnership. They’re making money via ads, and also have an equity stake in the venture. Also, as CD sales continue to decline, old school record executives are desperately seeking new ways to counteract the fact that consumers are becoming more and more comfortable with purchasing their media online. The record companies are also eager to wrestle back some of the power they feel that they’ve lost to Apple and iTunes. If MySpace music takes off and becomes a big hit, it will give the record companies more leverage in future negotiations with Apple. It’s well known that the big record companies aren’t too happy with the fact that Apple refuses to charge more than .99 cents per song per download. They would prefer to see Apple charge higher prices for newer songs and CD’s than for old ones.

Will new features be enough?

Many a service has tried to dethrone iTunes only to suffer a quick and painful defeat. So while MySpace music obviously faces an uphill battle, it seems to be one of the most compelling challenges to iTunes to date. One of the most intriguing features of MySpace music is that it will give users the option to create playlists of up to 100 songs, and listen to them all for free. Typically, streaming music supported via ads does not allow users to pick exactly what song they can listen to, or will only make available a limited number of songs from each artist. This seems to be one of the more attractive features of MySpace music, and with other niceties such as the ability to share playlists with people who are already your online friends, and the ability to search for relevant ringtones, will MySpace music actually cause a dent in Apple’s armor? Take a look at the new MySpace music service here, and see for yourself if iTunes has finally met its match.