California: Entrepreneurs behind Silicon Valley startup Lala.com hope to transform the CD-swapping site into a music portal where members can download songs directly to their iPods, bypassing the computer hard drives where most music is stored.
The Palo Alto-based company has an agreement in principle to sell nearly 200,000 songs from Warner Music Group Corp. for 99 cents each. Members will be able to play Warner songs for free, and the company will pay Warner a penny, each time someone listens to a song.
“This is a turning point for music companies and the entire industry,” said co-founder Bill Nguyen, 36, who founded six previous startups, including several that went public and one that sold for $850 million (Rs3400 crore).
Most other sites that provide streaming music charge a subscription fee or stream 30-second samples. Napster Inc., which has 830,000 members, has subscription fees and advertisements.
Lala.com contains no advertisements and revenue comes from members who buy new CDs or swap used CDs with each other for a fee of $1per disc. The site has about 300,000 members and is backed by venture firms Bain Capital and Ignition Partners.
Nguyen estimated the 23-person company would pay $140 million towards licensing fees over the next two years if number of members grow as projected. Executives are also in talks with other big labels like Sony BMG, EMI and Universal.
“We will be reporting some crazy losses at first but are prepared to weather the storm,” said Nguyen, who sports a boyish grin and flip-flops.
Analysts said Lala is taking a huge risk. As a full-service music site, it will compete not only against Apple Inc.’s iTunes, which sells 5 million songs a day, but e-commerce powerhouses Amazon.com Inc. and eBay Inc.
“It’s an audacious plan,” said Mike McGuire, vice president of research at Gartner Inc. “They’re not saying what a lot of new media companies say “We want to leverage your content without taking on any of the cost or risk.” Instead, they are saying to the labels, “We will deal with you, we will license the content and we will pay for it too.” It’s an old school move.”
Process of acquiring digitial music
To download songs to an iPod, members must download a 3-megabyte plug-in that runs on all major browsers on Windows and Macintosh computers. Because the songs are not stored on the PC hard drive, the primary source for files pirated on peer-to-peer networks, Lala will dispense with traditional digital rights management, thath controls which devices can play a song.
For tech-savvy users, it is small matter to copy music from an iPod hard drive to a PC. “You are always going to have people who hack the iPod to get something for free,” said Lala business developer John Kuch, 34. “But majority are not going to go out and find third-party software and pull it off the iPod and put it on a P2P network.”
ITunes has historically been about driving hardware sales and if there is another compelling source of music for the iPod, it makes the experience of owning one that much more compelling.