Can a Frog leap over the iPod?

A music download site is to offer all its content free of charge, legally. And others may follow

Just a few days ago, the name Spiral Frog would hardly have struck fear into the music and software sectors. It would probably have been met with blank looks all round. But now this New York-based internet start-up could succeed where the combined efforts of the entertainment industry, copyright lawyers and internet service providers have so far failed - in putting a stop to the illegal downloading of music. And by offering the first totally free, legal service for downloads, it also threatens to make paid-for rivals such as Apple's iTunes redundant.

Spiral Frog said last week that it would launch its venture in North America this December. The service is expected to be available in Europe, including the UK, by 2007.

The company says it already has the agreement of one of the four big record labels, Universal, to supply songs from its catalogue. Unlike rivals such as iTunes, which charges 79p per track, or Virgin Digital, charging £10 to £15 a month for a subscription to its music library, Spiral Frog will fund its service entirely from advertising.

It is unlikely that Spiral Frog's downloads will work with Apple's iPod, but the company could instead develop its own MP3 player to allow users to listen to its music on the move.

While the move may seem a huge gamble, the paid-for market is overcrowded and illegal download sites are still far more popular than their legal rivals. The music industry estimates that there could be as many as 40 "pirate" downloads for every legal track bought from sites such as iTunes or Real Networks' Rhapsody. So Spiral Frog reckons it may have found a profitable middle way.

Paul Hindley, managing director of the research firm MusicAlly, believes the move to free legal downloads was inevitable once the labels realised they could make a profit from online advertising alone.

"There was an argument that music would be devalued if it was free," he says, "but the major labels no longer think that - as long as they receive their money, whatever the source."

There have already been small steps taken towards free and leigitimate services. Companies such as Coca-Cola have given away music downloads as part of their promotional activity and, earlier this year, Napster, the now-legal music site, started providing some free content on a limited basis. Users can download for free, but if they want to move their music somewhere else - burn it on to a CD, for example, or put it on a portable music player - they need to upgrade to the paid-for service. Napster hopes that enough users will convert to paid-for subscribers to offset the cost of the free content.

Spiral Frog, though, appears to be relying on advertising revenue alone. The company has not disclosed the details of its business model, but industry sources believe it has pre-purchased music in a bulk deal from Universal, meaning it will need high advertising revenues to recoup its costs.

And to attract more users, it will have to persuade other record labels to join in. The service will also have to appeal not just to internet geeks but to the mass market, much in the way that iTunes and Napster have built up strong brands.

So far, Spiral Frog has said little about how it will ensure its users view adverts. They might simply have to watch them as they download music. But it is more likely that the company will create its own software that will allow the ads to be displayed on an MP3 player.

How well this works will be critical. "It will have to be non-invasive, because the service is drowning in ads. That is what has happened with some of the poorer peer-to-peer services [where people swap music files online]," says Mr Hindley of MusicAlly.

Ed Shedd, partner in the technology, media and telecoms practice at Deloitte, points out that the way Spiral Frog downloads are listened to on MP3 players will also determine whether the service can really take on the likes of iTunes. "For a free service to succeed, it needs to offer high convenience across as many locations as possible," he says.

The final big factor that will make or break Spiral Frog, and other services that could follow its lead, is whether it can give music fans the content they want.

"There will always be people wanting something for nothing," says Jonathan Arber, an analyst at Ovum, the IT and telecoms consultancy. "Spiral Frog says [free downloads] will attract kids away from peer-to-peer sites, but to do that, they have to offer [a wider] range of content."

Mr Arber doubts that Spiral Frog will dislodge iTunes and its music player, the iPod, from their No 1 position in the market. "This won't be an iPod killer, if only for the reason that you won't be able to play these downloads on an iPod," he says. "We have always seen the ad-funded model as a way of hooking consumers in, and persuading them that the service is something worth paying for."

However, that Spiral Frog might succeed is a possibility that cannot be ruled out. And even if it fails, the business model of free legal downloads could catch on. In a crowded market, most believe businesses will either have to merge or look for new ways to build the scale they need to compete with Apple.

"Sites like these don't necessarily need a big-bang approach or to get it all right first time," says Deloitte's Mr Shedd. "With it being PC based [rather than both PC and Mac based] and limited to one record label, it's not a great offer. But this could build up momentum."

Other internet services have shown that breadth of content is vital to success. For example, Google works because it can find almost anything on the internet, for free. It already allows users to search, if not directly download, video and audio. And it announced last week that it was planning to set up a download service for out-of-copyright books, allowing users to print them out for the first time, so putting it in direct competition with both conventional and online bookstores.

But if a giant like Google were to offer free music downloads, backed by its huge strength in online advertising, it would prove a far bigger threat than Spiral Frog. And then the paid-for music download model could croak.

Ripe for the picking: Apple and its online rivals

ITunes

Apple Computer's hugely popular service. Songs cost 79p each, while most albums sell for £7.99. IPods, accessories and tracks account for around 45 per cent of turnover at the Mac maker.

Rhapsody

Owned by US media group RealNetworks, the site requires a monthly subscription that gives users access to its entire library.

Virgin Digital

The online music arm of the Virgin empire. It charges up to £15 per month for unlimited downloads.

Napster

One of the first downloading sites. Popularised the concept but was forced to close for illegally failing to charge users. It is now owned by the Californian IT company Roxio and offers a legal mix of free and for-sale music.

Allofmp3.com

A Russian site that sells albums for £1 or less. Being sued by the BPI, the music industry's trade body.

Danny Fortson