The service, to be dubbed MySpace Music, will be integrated into the popular online hangout, which got its start as a launching pad for emerging bands seeking to connect with passionate music fans.
MySpace Music would provide the labels with a digital outlet to compete against Apple Inc.'s iTunes, which has emerged as the second-largest music retailer in the U.S. after Wal-Mart Stores Inc. The service will be a one-stop shop offering music downloads, streams, videos and mobile phone ring tones, along with related items, such as merchandise and concert tickets.
"It will likely give iTunes a run for its money," said one music industry executive who spoke on condition of anonymity because the deal has not yet been announced. "ITunes is a download store. This venture is not just a store, it is a thriving, growing community of people. So it will have a myriad of products that quite frankly iTunes does not offer."
News Corp., Sony BMG Music Entertainment, Universal Music Group and Warner Music Group Corp. will each take an equity stake in the venture, people familiar with the deal said. EMI Group, the fourth-largest music label, is still in discussions with MySpace.
MySpace and the music companies declined to comment.
"It's such an obvious idea," said Eric Garland, chief executive of BigChampagne Online Media Measurement, a market research firm.
"MySpace is already a destination for music and music fans. You could argue that MySpace is one of the top distributors of music in the world."
It remains to be seen whether people who gather to share their love of music in communities such as MySpace can be persuaded to pay for it, Garland said.
MySpace executives approached the music labels about a possible joint venture several months ago, talking about how to capitalize on its already strong music platform, which attracted about 68 million people in February, according to online measurement firm ComScore Media Metrix. The site also hired Fred Davis, founding partner of Beverly Hills law firm Davis, Shapiro, Lewit & Hayes, to represent it in negotiations with the music companies.
"In many ways, it is an unprecedented foray into music on the Web," said one person familiar with the deal. "Now, you have music discovery happening in some places, and music consumption happening somewhere else, and the non-recording aspects of music, such as ticket purchases and merchandising, happening even elsewhere. MySpace Music is going to aggregate all those disparate activities."
MySpace Music would combine free and paid services. Music streams and music videos would be free to users, but carry advertising. Downloads, ring tones and ring-back tones would be sold.
One obstacle to the deal has been a 2006 copyright lawsuit filed by Universal Music against MySpace, which it described as a "vast virtual warehouse" of pirated works from some of the company's best-known artists, including Mariah Carey, Diana Krall and U2. A Universal Music spokesman declined to comment on the status of the suit.
The music industry has struggled with plummeting CD sales and revenue lost from illegal downloading of music online.
Sales of digital music at online stores such as iTunes have not offset the industry's loss in revenue.
The MySpace Music service presents a potential new source of revenue. Some music executives hope it might also challenge Apple, which some of them complain is inflexible and too powerful.
"It's unlocking the value of music in the online space," said a music industry source, who spoke on condition of anonymity.
"It's that community atmosphere, that community that you're tapping into and monetizing. It's sort of the new MTV."