Perhaps the greatest challenges to companies like MySpace Music and Facebook may not be from the big players, but startups that offer artists greater control over their work and pricing flexibility.

This is fair picture. Forecasts generally call for moderate growth in online advertising through 2009. eMarketer expects the market to increase 14.5 percent in 2009.

Even with this outlook, digital music companies face challenges above and beyond what lies ahead with the economy.

MySpace Music is definitely the big player, but criticism about the service ranges from a poor UI to how they treat indie labels. Add to that a potential competitor like Facebook and the issues intensify. Brooks took repeated questions about why they gave the major labels preferential treatment. Brooks said that MySpace Music will phase in new services to provide the indies more of a presence. That reality materialized today. Digital music distributor IODA has signed on to make its catalog available on MySpace Music.

But perhaps the greatest challenges to companies like MySpace Music and Facebook may not be from the big players, but startups that offer artists greater control over their work and pricing flexibility.

Rise of the Band Blogs?

Of the startups that presented at the conference. Bandcamp received some of the highest acclaim. BandCamp is a blog platform designed for musicians. The platform is similar to Blogger or Wordpress but with limited flexibility. The service is free. Sites are designed for search engine optimization. The site has a Flash player but everything around it is HTML. BandCamp includes an analytics platform that details page views, music sales and what tracks musicians played. The service integrates with Paypal. Tracks may be offered for free.

Artists determine the price for their music. The artist uploads their tracks as .AIF or .WAV files. BandCamp converts the file and then offers the artist a selection of different formats for their play list. Artists may choose to sell the music as an mp3, for instance, at a high or low bit rate, setting the price accordingly. There even appears to be the ability to do variable pricing, something the majors have wanted to do for quite some time. BandCamp takes no cut from the sale. Musicians host their own sites.

For BandCamp Founder Ethan Diamond, the service is about giving artists control. He likes to call themselves the "very nerdy" fifth Beatle who takes care of all the geeky stuff so the band may do what they do best.

In his presentation, Diamond sharply criticized the practices of companies that do not provide artists with complete ownership of their works. Diamond has said before that Imeem and MySpace Music both fit into this camp. The companies that engage in this practice he called "online sharecroppers."

Already The Dynamics Are Changing

Steve Jang, vice president of marketing and business development at imeem, sat on the panel with Brooks and Batt. He seemed pretty quiet compared to his colleagues.

He must have had a lot on his mind, listening to his counterparts talk about the business. As we reported this week, Imeem is up for sale. They've laid off 25 percent of their staff. Warner Bros, as you may recall, sued Imeem earlier this year. They later dropped the suit in exchange for an equity stake in the company.

And so, who will purchase Imeem? Is this a play for Facebook?

Oh, these times are a changin'. :-)

Imeem is one of Sequoia's portfolio companies, so it doesn't come as a surprise that it is looking to keep its budget under control, but we do think that Imeem is going to have a hard time finding a buyer in these tough economic times.

Update: We just got a response from Imeem. The company is indeed laying off 25% of its staff (20 positions) in order to cut cost, but wouldn't comment on the rumors around a potential sale of the company.

Imeem's last funding round was a Series C round led by Sequoia in April, though the company did not reveal the actual amount of this investment. Warner Brothers also invested about $15 million in Imeem. Imeem has licensing deals with all of the major record labels, as well as with a large number of independents labels.

$200 Million

While Imeem's valuation is a bit hard to estimate, PaidContent reports that Imeem and its investors would be looking for somewhere "north of $200 million." Given the current economic climate and the strong competition in the streaming music business, $200 million might be a rather high number, however, and this will surely scare off quite a few potential buyers.

SearchMe, which combines a search engine with a highly visual, CoverFlow-like interface, has seen rapid growth over the last few months and this new feature will surely help the company to attract even more users.

One of the best features of SearchMe's new music search is that it automatically plays the next item after a song is finished. Thanks to SearchMe's 'stacks,' which are basically SearchMe's more visual take on bookmarks, you can now use SearchMe to build your own mixtapes and integrate them into your blog or social network page.

Neither Imeem nor SearchMe have made any announcements about a partnership, but it seems likely that SearchMe is just using Imeem's API to power this new feature.

The only negative aspect of this new feature we have found so far is that there doesn't seem to be a way to stop the embedded music stacks from automatically playing as a page is loaded. Because of this, we decided not to embed a custom mixtape in this post, but you can find one here if you want to see (and hear) what this new feature looks like.

Mufin.com, however, which launched today, uses a fully automated system that only takes the actual sounds of a song into consideration. In our tests, Mufin often returned good results, but the fact that it doesn't take genres or the quality of a song into account can make for a frustrating experience at times.

Eclectic Recommendations

There is something to be said for this completely algorithmic approach. While social recommendation services tend to return results that safely stay within the same genre as the original song, Mufin's choices are far more eclectic. The most closely related song to Rick Astley's seminal "Never Gonna Give You Up," for example, is a song in Bavarian by a German folk pop group. Mufin really seems to like German songs, by the way, as more than half of the songs it recommended as similar to Frank Zappa's "Muffin Man" were from a Sesame Street album in German. In Mufin's defense, though, all these songs were quite similar in style to the original song.

Social Recommendations vs. Algorithms

As MG Siegler points out, the real advantage of social recommendation engines is that they are very good at filtering out bad music (though one might also argue that this can lead to slightly boring recommendations at times). Mufin neither cares about the quality of the music nor its popularity or language; it only looks at characteristics like tempo, instruments, sound density, and harmony.

Limitations

Mufin has already built an extensive library of songs, but it only holds the right to a limited set of them, which means that you simply can't play a lot of the recommended songs. Those songs that can be played are limited to 30-second previews , which can make it hard to decide if a song is really good and similar enough to warrant buying it.

If Mufin had partnered with a service like Rhapsody, for example, users would at least have been able to stream a limited number of full songs every month. Every song on Mufin features a link to iTunes and the Amazon music store.

Overall, we think Mufin is an interesting experiment, but we are not convinced that its algorithms return better recommendations than the more social approach of its competitors or the classification system of the Music Genome Project that drives Pandora's recommendation engine.

We started out by asking about the increasing competition in online music this year.

RJ: The space is crowded, I agree, and people now have a lot of choice if they want to listen to music for free. That's great for music fans - but what it means is that navigating through that mass of music is now the priority for them. It's all very well having millions of tracks at your disposal on Myspace or Imeem, but what's the use if you can't find what you want?

We have a unique recommendation system, drawing on the data of over 43 million individual songs, and the listening habits of 25 million music fans, enabling us to guide users through a 5 million + catalogue of freely streamable tracks and help them find stuff suited to their taste.

Recommendation and discovery is key in this space now - and we've been working on this for 6 years, and every day we continue to refine the process, so we're confident that we can continue to offer a better, more personalised music experience than anyone else online.

RWW: One of the things that's made Imeem a success this year - it's reportedly now the No. 1 streaming music site in the US - has been its licensing deal with all 4 of the major record labels, plus by their estimates around 80% of the indie music market. MySpace Music has 3 of the majors and has been criticized for its lack of attention to the independents. Can you clarify for our readers where last.fm sits in terms of licensing with the 4 majors and independents?

RJ: We have music from 3 of the majors, and renegotiations with Warner are ongoing. Our indie catalogue is equivalent to Imeem's - it includes millions of tracks from IODA, The Orchard, CD Baby and thousands of independent labels and artists - and we are currently in negotiations with Merlin. We continue to aim for the most comprehensive music catalogue online, and are making great progress towards that.

What's even more important, though, with regards to this point, is that we ensure all labels and artists are paid when their music is streamed on the site - and since the launch of our Artist Royalty Program, that means unsigned and DIY artists too. No one else is offering a share of revenue to unsigned musicians in this way.

RWW: You recently released a new version of the last.fm iphone app -- how crucial do you think mobile apps will be when competing against the likes of MySpace, Imeem and Pandora? Do you think you have any advantages over your rivals in this area?

We want the Last.fm experience to be accessible everywhere, so mobile is hugely important to us. At the moment the iPhone dominates, and our only competition there is really Pandora, which is limited to the US whereas our app is available in the US, UK, Canada, Germany, Spain and France, with more countries to come. Plus it's much more feature-rich and draws on a much larger music catalogue.

It's a cool app and I think it's the one that real passionate music fans choose because we really reach into the Long Tail in the music we play.

See also: Interview With Last.fm Founder Richard Jones: Part 2, Business Models and Part 3, Design & Features

The most notable changes are a new homepage for the site and a modified navigation menu you see at the top of every page. Also some new features have been introduced. Summarising from the Imeem blog post:

Spotlight: features the latest music, videos and entertainment people are posting on imeem. Expect to see "exclusive new music, popular videos, and celebrity playlists from your favorite artists."

Discover: gives you personalized recommendations of music, videos, artists and people, based upon your listening and viewing habits and those of the people you are connected to in the imeem community.

Browse: offers chart-based browsing of any media content (music, videos, photos and more) based on its popularity site-wide. You can now filter by content type, genre, and popularity in the imeem community.

Artist Pages: You can now search to find new Artist Pages, which pull everything posted by the community related to that artist into one page on the site. Also features the complete catalog of content created by the artist and a list of who else is a fan on imeem.

My immediate reaction is that the re-design is less cluttered than the previous design. When I did a search on Nirvana, I discovered some videos I hadn't run across before and my favorite feature of Imeem - the playlists - are more easily accessed and explored. Also finding new friends based on music taste is easier.

The Artist pages are excellent, full of links and videos to delve into:

Up till now I've mostly just dipped into Imeem to listen to cool music I haven't been able to find elsewhere. In the past I've tried to navigate around and explore, but found the process difficult. This new design appears to encourage more exploring of music and linking with other people with similar tastes. So I'll be giving it another try as a music social network.

Add to this new design the existing innovative features of Imeem, such as the March launch of a developer platform that enabled read/write access to user information, widgets that can be embedded practically anywhere (unlike its competition MySpace Music), and rich apps like Fanbase (an Adobe AIR app that Atlantic Records created in collaboration with Imeem) and you have a site that continues to make listening to music online a pleasurable experience.

If you're a fan of Imeem, let us know in the comments what you think of the new design.

As is typical for Apple, the company is not exactly transparent when it comes to describing how the 'Genius' feature actually works. It looks as if Apple compares your music selection to that of other users and then builds its recommendations based on this. We assume that iTunes looks at data about play and skip counts, beats per minute (which is available for all songs in the iTunes store), ratings, and playlists.

Because these recommendations are at least partly based on the libraries of other iTunes users, iTunes periodically downloads updated recommendations. You can also force an update from the 'Store' menu.

One fact that surprised us was that Apple often returned playlists for songs that were clearly mislabeled, which has led us to speculate if Apple, during the first run of Genius, actually creates an acoustic fingerprint for every song.

According to Apple, all the uploaded information is anonymized.

Does it Work?

In our tests, the recommendations and playlists were often spot-on, but also a bit inconsistent. Sometimes we would get great recommendations based on songs from rather obscure bands, while we sometimes couldn't get any recommendations based on songs from more popular and contemporary artists. For classical music, the recommendation feature basically didn't work at all.

We also noticed that the recommendations tend to favor more popular mainstream artists, but that could easily be a function of the current user base.

Apple points out that the recommendation engine will get better over time, as more users start uploading their information. It would be nice, however, if Apple also gave users a chance to tweak settings for themselves or at least gave us more information about how these recommendations are calculated.

One minor annoyance when using the recommendations is that if you decide to build a Genius playlist based on a song that is already playing, iTunes starts the song over after creating the new playlist.

What about Last.fm and Pandora?

As Last.fm co-founder Marting Stiksel pointed out in an interview with Wired's Eliot Van Buskirk, the 'Genius' feature basically validates what other music recommendation services have been doing for a long time.

It's also important to point out that a lot of other music recommendation services have strong, built-in social networking functions. Apple, even though it now has information about the listening habits of a large chunk of its users, does nothing to connect these users. One neat function, for example, would be for iTunes to show playlists from other users that have a certain songs in it. For now, though, it doesn't seem as if Apple is interested in adding these social aspects to iTunes anytime soon.

Rediscovering Music

For now, when it works, Apple's recommendations are actually a very nice way of rediscovering a lot of music that had long been sitting in our jukebox but never saw the day of light. We also assume that the shopping recommendations in the sidebar will drive more traffic to Apple's music store, especially once the recommendations get a bit better and users get comfortable with trusting Apple's recommendations.