As ad-supported music services increase in popularity and falter financially, content owners need to consider the consequences of their negotiations. Lowering rates may provide short-term relief, but doing so may limit the creation of better products and business models. Rather than save a distressed music service and endorse its current business, labels may want to encourage evolution by keeping rates unchanged.

The term that applies to this case is one that has been used often during the credit crisis: moral hazard. When a company is saved rather than face the consequences for its poor decisions, it will have less incentive to change its behavior to avert similar failures in the future. Detroit automakers have been a common example. If they had been forced to make wholesale changes rather than take the courses of action that have lead them to seek multiple bailouts, G.M., Ford and Chrysler may not be in such poor shape today. By not allowing natural market forces to punish the automakers, the government, it can be argued, has brought moral hazard into the picture.

Talk about rates charged by labels hit another crescendo last week. Last.fm's plan to adopt a subscription model in some counties, debate and coverage continues at both the Last.fm blog and message board. Discussion about Imeem started with a report at TechCrunch that claimed the online streaming service was rumored to be in "serious trouble" and owed creditors upward of $30 million. Wired reported Imeem was hoping to renegotiate some its deals with labels. Then a source confirmed to MediaMemo that Imeem had indeed restructured its deals with "some of the big music labels," one specifically being Universal Music Group.

Both events reignited debate about rates charged by content owners to ad-supported music streaming sites. Throughout much of the blogosphere, online news sites and message boards, the common sentiment is that labels charge onerous rates that prohibit the growth of the streaming segment of the market. The drop in funding for music startups is evidence venture capitalists see costs, not business models, as the problem. For the sake of healthy debate, these notions need to be flipped on their heads.

An unspoken assumption that must be challenged is that these troubled music services have the correct business model in the first place. If a profit cannot be attained, one should question whether or not a service is maximizing the value of its assets and user base. If an advertisement model does not bring in enough to pay for the goods being offered, the validity of that model should be contested. If users value the service but refuse to pay a small subscription fee, one should ask if a different product should be offered.

In most instances, a business prices the good or service in a way that will help cover its costs and, eventually, allow for a profit. If the wholesale rate is too high, the retail price will be too high and sales will be disappointing. To improve sales, a supplier can drop the wholesale price so retailers may drop the prices they charge. The supplier will lower the wholesale price to a level that still allows it to make a profit. Any one retailer may not be so successful. Its customer service, shopping experience, advertising or merchandising may be inferior to those of its competitors. In such a case, the onus is on the retailer to make the necessary changes.

The world of free, ad-supported services is different than the classic supplier-retailer example. There is no price through which to manipulate consumer behavior (although one can reduce the number of users by charging a fee). This makes it more difficult to ascertain if the wholesale price or other factors are behind the service's losses. Record labels are currently in this predicament.

Another unchallenged assumption that underlines nearly all debate is that Imeem at al have the right to exist. That's just not the case. Unless labels act in a way that limits competition - and uniform rates for its songs do not do this - they have no legal or moral duty to reduce their rates to keep a music service afloat. Labels have a long history of working with troubled brick-and-mortar retailers so their product will still be available (through payment terms and other non-price-related arrangements). Those efforts are clearly in labels' best interests. Stock levels and sales would drop if the stores did not stock their CDs. In the world of digital music, alternatives are plenty. One fewer music service may make a difference, but it may not. Let's not assume an absence of Imeem would leave consumers, labels or artists any worse off.

If there is a value in remaining steadfast, it is the encouragement of different, more successful business models. Adhering to normal rates sends an important message to the market, and one that labels have heard for the last decade: Your failed business model is not my problem. It's a tough love approach that will save the better of the companies and weed out the weaker ones.

By abandoning the value they place on their assets, content owners are bringing moral hazard into the market. When rates are lowered, ad-supported sites will have fewer incentives to make necessary changes to their business models in order to derive value commensurate with their cost structures. Rather than challenge assumptions and consider radical alternatives, these companies will have an incentive to remain with the status quo.

There are a multitude of differences between the Detroit automakers and music services such as Imeem and Last.fm. The one thing they have in common is a belief that small tweaks will save their business models. Such thinking has not benefitted Detroit, and it will not benefit these music services.