MySpace Music launch disappoints excluded indie labels

British group Arctic Monkeys' lead singer Alex Turner performs during the Glastonbury music festival in Somerset, England June 22, 2007.

NEW YORK (Reuters) - The launch of MySpace Music ran into controversy on Thursday after the leading independent music trade body complained that its small music label members had been shut out and treated like second class citizens.

The new music site opened shop with millions of free songs for streaming and paid downloads, but without agreements covering hundreds of labels representing well-known artists like Franz Ferdinand, Tom Waits, Arctic Monkeys and Bjork.

MySpace Music is a joint venture between News Corp's MySpace and the four major music companies: Vivendi's Universal Music Group, Sony BMG Music, Warner Music Group and EMI Music.

Each major has a small minority stake proportional to its U.S. music sale market share. Revenue from the site will be largely supported by advertising, which will be shared with labels and artists.

MySpace Music and some top independent labels, meanwhile, have failed to come to an agreement on terms, resulting in the exclusion of a number of popular artists from the site.

Merlin, the independent labels global rights agency whose member labels include Koch, Beggars Group, Tommy Boy and Domino, said it was "disappointing" that MySpace launched without a deal with its members.

Merlin is seeking an agreement similar to that struck by the majors labels. This includes an ad revenue-supported licensing agreement and a stake in the MySpace Music proportional to Merlin's 9 percent market share in the U.S. This would make it equal or bigger than EMI, the smallest of the four majors.

Chief Executive Charles Caldas said if the indie labels signed a deal only pertaining to ad revenue they would fail to share in the growth of the MySpace Music business, which their artists would potentially fuel.

The major labels, on the other hand, would benefit from that growth, as well as ad revenue, he said.

"Whilst Merlin continues our negotiations, we remain extremely concerned that with MySpace Music the major record labels are acting not only as competitors, but through their equity stakes in the venture, as the clients/end user as well," Caldas said in a statement.

A Merlin spokesman later said the indie labels had been treated like "second class citizens".

In a statement MySpace said a deal is on the table for Merlin: "We have offered a relationship with Merlin that provides equal opportunities to Merlin's Labels and Merlin's artists that we have provided to all labels and artists.

MySpace Music did reach a licensing agreement with independent digital music distributor The Orchard, which carries 1.3 million tracks. But The Orchard did not get a stake in the business.

The Orchard Chief Executive Greg Scholl said the fact his company had not taken a stake in MySpace had allowed him to negotiate for "more aggressive" advertising share rates than the major labels. He also said taking an equity stake in MySpace Music was not a priority for his business.

"If any independents get equity I'm confident my clients will get a stake. The real issue should be profit sharing," said Scholl, whose company's clients include small labels like Shanachie, Gut Recordings and Greensleeves.

(Reporting by Yinka Adegoke)