Qtrax, the upcoming first legal ad-supported P2P network due to launch this September, has announced today that it has added content from Sony BMG Music Entertainment to its offerings of free MP3s.

Through this agreement, Qtrax users will be able to access songs for a predefined number of times for free, most likely five when it comes to the most popular artists. Each time a user plays a track, the Qtrax player will also offer fans click-to-buy purchase options. Users will also have to view some sort of advertising before each song is played.

“We are pleased to announce that we have completed this agreement with Qtrax, and look forward to working with them as part of our ongoing campaign to build new opportunities for our artists within the digital marketplace,” commented Thomas Hesse, President, Global Digital Business & U.S. Sales, Sony BMG Music Entertainment.

Qtrax, which plans to debut in September, already has deals in place to offer content from Warner Music Group and EMI Group as well.

Additionally, Qtrax is currently in negotiations with Universal Music Group and Merlin, an agency that represents a number of independent music labels.

Allan Klepfisz, President and CEO of Brilliant Technologies, said, “We are extremely pleased to have Sony BMG on board. Qtrax has received support and indeed enthusiasm among stakeholders in all sectors of the music industry. The basis for the enthusiasm differs from organization to organization and therein lies, I believe, the potential of Qtrax. Some see it as trailblazing the ad-supported model and allowing the possibility that in future music downloading will be paid for, in part or in whole, by advertisers. Others see it as an effective means of encouraging consumers to sample and subsequently purchase music. Still others see it as the ultimate tool against piracy.”

Revenue from advertising would be used to compensate the music labels that make their songs available. Labels have been very reluctant to legitimize the idea of free music but, they are also extremely eager to find new business models that offer additional revenue to compensate for the decreasing sales of compact discs.

Terry McBride, the chief executive of the Nettwerk Music Group, a label and artist management company, believes a legitimate P2P service could appeal to illegal downloaders, simply because it works much like the programs they use now.

“My philosophy is, don’t try to get people to consume the way you want them to,” he said. “Figure out how they’re consuming music, market to that and monetize their behavior.” Nettwerk works with a company called Intent MediaWorks, which seeds peer-to-peer networks with copies of the label’s songs that contain advertising.

Music Labels hope that the legitimacy and convenience of services like Qtrax will help them compete with unauthorized offerings. “We hope this service will draw from the illegal P-to-P sites,” said George White, senior vice president, Strategy and Product Development for Warner Music Group.

Qtrax will work much like any other file-sharing program, and will be using the Gnutella network to connect users. However, unlike regular P2P programs that use Gnutella, it will only list music files that it has permission to play. It will then display relevant advertising similar to what Google does for queries in its search engine. Klepfisz said that labels will be able to buy advertising geared towards a particular genre and not to a particular artist.

If listeners like the song they can then purchase it on the spot. Revenue from music purchases will be initially be its primary source of income but, Qtrax plans to eventually make most of its revenue through the sale of advertising. “Our challenge is to demonstrate that ad-supported P2P is lucrative enough that everyone is going to be happy,” Mr. Klepfisz said. “The real issue for the industry is that right now there are all these people paying nothing for music.”

To note though, Qtrax will initially have a revenue-sharing arrangement with music labels. Eventually, it will have to pay the labels a royalty each time a user plays a song.

Whether or not advertising will be enough to offset the royalty is as yet to be determined of course but, for the user it will still mean free music for otherwise it makes no sense for them to use it in the first place.

“I’m a believer in advertising, which pays for an awful lot of media consumption in the U.S.,” said David Card, a senior analyst at Jupiter Research. “But I have yet to see the model that makes me feel good they’ll get enough money out of advertising. The question is, can they get enough mass to lower the royalty?”

All in all, I found the business model both creative and somewhat groundbreaking but, I’m not fully convinced yet that it will have the means to succeed. For if a user is limited to play a track no more than 5 times, then it essentially becomes little more than a fancy music preview program, and there’s tons of sites out there that already allow a similar ability without all the headache of installation and advertising.

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Legal P2P networks have become more commonplace in the wake of the crackdowns on illegal file sharing, and major record labels appear to be interested in collaborating with them. Last month, EMI struck a similar licensing deal with start-up Mashboxx; like Qtrax, Mashboxx has yet to launch. The business models of these legal P2P networks vary, however.