Universal Music Group has never been shy about shaking things up in the digital music space. The company demanded a per-device payment from Microsoft before licensing music to the Zune Marketplace. It spearheaded efforts to monetize online music videos and worked with Nokia to embed the cost of content in a Comes With Music mobile phone.

Serving as point man on these initiatives and trusted counselor to chairman/CEO Doug Morris is Rio Caraeff, executive VP of the label's eLabs digital division. Originally hired to oversee Universal Music Mobile, Caraeff now leads all digital initiatives at the world's largest music company.

His mandate is to develop Universal's various digital music efforts into a $1 billion business. To get there, Caraeff knows that his company will have to do a lot more than sell a few songs on iTunes. Right now, downloads account for the vast majority of Universal's digital revenue, which Caraeff estimates is up 35%-40% from the previous year.

But he's also eyeing opportunities in ad-supported music, online video and mobile applications. And his most important task may be leading the industry's transition from a business model based on maximizing unit sales to one based on maximizing revenue per user.

In an interview with Billboard, Caraeff talked about the challenges in cooperating with Internet service providers (ISPs), the benefits of shedding digital rights management (DRM) restrictions and the thinking behind the label's recent investments in startup companies.

Which new digital revenue stream came into its own in 2008?

The largest gainer and the revenue stream with the most promise is ad-supported video. A lot of that is being driven by YouTube coming into its own in terms of monetizing and advertising. The difference from [the third quarter to the second quarter] is almost 80%. 2008 was also the year of the ad-supported audio stream. That's had its up and downs, with the softening of the ad market, with the challenges with [venture capital], with the search for business models to monetize audio streams through ads. It's not that they may not work, but they're challenged in the short term to find revenue growth. It's easier to advertise around video than it is to advertise around audio.

Where are you focused for 2009?

Click here for the full Q&A, which includes Caraeff's thoughts on selling DRM-free music, the strategy behind investments in companies like AMP'd and Buzznet, and more.