ISP’s New Music Service Will Pay Labels For ‘Illegal’ Downloads

imageimageOne of the UK’s top ISPs is preparing to launch an unlimited music service that would see it pay record labels for songs illegally downloaded by its customers, paidContent:UK can reveal.

Playlouder MSP (music service provider), which first tried the model for itself back in 2003, said it will facilitate the service for the broadband operator, starting early next year. Co-founder Paul Sanders would not name the ISP, but a source last month told paidContent:UK Virgin Media (NSDQ: VMED) was holding some kind of talks with the vendor.

For more on the digital music industry, attend our EconMusic conference on Sep. 23 at the Natural History Museum in London. Early bird ticket sales are now open

More after the jump…

Now that the biggest six ISPs have pledged to reduce illegal downloading on their networks, they need commercial alternatives that will prove similarly enticing – and subscriptions offering tunes-on-tap are emerging as the front runner for consumers already plucking free music from the “celestial jukebox”.

Playlouder’s service lets users legitimately download from channels like Gnutella, BitTorrent and more – the list goes on – because the “deep packet inspection” technology, installed on the broadband infrastructure, recognises every song downloaded over the ISP network, no matter which protocol, and reimburses rightsholders accordingly. Subscribers to the music package will even be allowed to share tunes amongst themselves because every transfer is anonymously tracked using Audible (NSDQ: ADBL) Magic, but proliferation to non-subscribers will be blocked.

The effective legitimisation of P2P channels many consider “illegal” could be a watershed – but depends on whether the ISPs can convince customers to pay a monthly fee for unlimited access they’re already getting gratis. The thousands of warning letters they’ve pledged to send may help shepherd freeloaders away from free, creating new markets. Recent research showed 95 percent of UK consumers copy music and last week’s study showing the scale of Radiohead BitTorrents suggested many listeners are loathe to use official legal channels, so a framework that extracts money from P2P, without weening users off their favourite habit, could be a winner.

“We are confident that we will have something quite good to announce in the next couple of months,” Sanders said. “We’ve just done another round of (seed) finance from senior figures in the financial community and the music community, and we wouldn’t have been able to do that if we didn’t think there was good news coming down the pipe. We’re starting the process of principal finance, we’re looking for about £4 million; it takes us through to profitability because it will essentially finance this first large ISP deal.”

For Sanders, what is Playlouder’s first ever client in five whole years of operating comes better late than never. Formed out of the early music webzine of the same name, Playlouder in 2003 debuted MSP, its own attempt at an £18-a-month ISP service with bundled music package. Three years in, and squeezed out by the ISP big boys, however, the outfit had signed only a handful of subscribers and was mothballed to a mere R&D project while Playlouder switched to focus on selling the service to the bigger providers.

On both counts, the service was way ahead of its time, conceived when labels were still advocating DRM. Speaking to me in Playlouder’s reclaimed Hoxton warehouse that is every inch the 90s trendy HQ, a weary Sanders bares many battle scars from half a decade mediating between those in the often mutually incomprenhesible ISP and music worlds, all in pursuit of the subscription dream. It’s been an uphill struggle that has taken its toll financially, too – asked if the business is supporting itself, Sanders admitted: “No, we have almost no revenue.”

But now the industry’s growing interest in the subscription music model (Sky, Nokia (NYSE: NOK), Orange et al all launching one) could finally mean real business for Playlouder, and Sanders is in the unique position of having learned more than perhaps anyone in the UK about the emerging consumer model that promises to restore to the music business much of the revenue it’s lost to piracy.

“Patience is a virtue,” he said. “This is a very slow business, I can tell you. But I haven’t been working on this for five years to decide not to prove the model at the last minute – this is new territory for ISPs and the music industry.” Perhaps hinting at the upcoming ISP deal: “If some things that we know are happening come to fruition, then we should see a breakthrough early next year. It’s not rocket science – give ’em what they want, ask them to pay for it.” Sanders said subscriptions would bring a “huge amount more” money to music because customers buy only 2.4 albums a year (approx (£24) but would pay £5 per month (£60 annually) for unlimited access.

Playlouder is licensed to use music from EMI, SonyBMG, several indies and one more big label is on the way, Sanders revealed. So confident is he in what could finally be the realisation of his original goal, however, Sanders has ruled out selling equity to any ISP – despite approaches from both broadband and music providers – hoping instead to sell the service to “as many of them as possible”. The Playlouder system will work on any ISP’s network, Sanders said.