MP3 sites see ad revenue jump thanks to Napster

Napster may or may not be good for CD sales, but online music sites can thank the popular file-swapping service for a substantial surge in revenues last month, according to a new study. Advertising spending at online music sites jumped dramatically in the week after a federal judge clamped down on the music company, according to AdRelevance, a division of online traffic measurement company Media Metrix.

Before the ruling, advertisers spent about $2 million on music and streaming sites. In the week after, that figure jumped to about $5 million, researchers reported. "Soon as the Napster ruling came down, people flocked to the music sites and created an opportunity for advertisers to jump into the action," said Marc Ryan, one of the authors of a report. The report comes amid a heated debate over the commercial impact of Napster and other free file-swapping networks that allow users to find and trade music and other digital content online without paying copyright holders.

The recording industry has sued Napster arguing that the service -- which launched barely a year ago -- has already cut significantly into revenues. In its complaint, the Recording Industry Association of America cited a study conducted by SoundScan that suggested slowing CD sales at music stores located near college campuses.

That report was countered by research published by Jupiter Communications noting that Napster users buy more music than consumers who don’t use the service. The AdRelevance report sheds light on a mostly-overlooked aspect to the economics of file-swapping by tracking the advertising dollars that have followed the enormous consumer interest in the product.

The increase in marketing dollars traced to Napster highlights a less welcome trend for online media, however, by offering more evidence of the volatility of Internet advertising. In August, U.S. District Judge Marilyn Hall Patel ordered the company to stop allowing copyrighted works to be traded on its system, a decision Napster’s attorneys said would effectively shut down the service.

The order touched off a flurry of activity at online music sites as music lovers apparently rushed to the Net to get free copies of their favorite tunes before the services were blocked for good. The rush didn’t go unnoticed by advertisers. In February, for example, Media Metrix recorded 1.1 million unique visitors to the Napster site. After the July 26 court ruling, Napster hosted 4.9 million unique visitors.

The high traffic numbers lured new advertisers such as State Farm Insurance, Bonzi Software, Allstate, Network Solutions, X10, and Citicorp. Ryan and Martin looked at 23 Web sites including Napster, SonicNet.com and AudioFind. The surge in revenues was short-lived, however, as traffic and advertisers retreated after a federal appeals court agreed to temporarily suspend Patel’s decision pending Napster’s appeal. "The reality is that advertisers need to look where they will be able to reach the most people so they follow fads," Ryan said. "The problem with this strategy is, are they reaching the right audience."

Sports sites are experiencing much of the same bounce in advertising revenues during the Olympics, but analysts say the games won’t likely kick-start Web ad spending by big-brand advertisers, which have mostly stayed on the sidelines of the online marketing game. As for the music sites, Ryan believes there will be another rush of visitors after another Napster court hearing in the appellate courts. And advertisers will likely take advantage of that traffic.

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