On a day when a major security company published a report that online music is more dangerous to your computer than web porn; a day when Microsoft got headlines for an initiative to use the combined promotional strength of its brands to help promote new emerging musicians; a day when Apple announced a creative initiative to encourage musicians from different countries to translate and cover each other’s music, the award for the most interesting headlines in the music industry likely belongs to a virtual unknown: a little company called Lala.
The little known startup, which heretofore was primarily focused on providing an exchange where music fans can trade used CD’s for a fee, is expected to announce that it will begin making the majority of music in the Warner Music catalog available for free online.
LaLa’s ambitious plan is to provide free streaming music, for which it will pay licensing fees to the music labels on a per/play basis. Alongside the web music player, subscribers to Lala will be able to buy music in digital download or CD format. From these sales LaLa hopes to sell enough music to cover its sizeable licensing expenses. (estimated by the company’s founder and CEO in a New York Times article to be as high as $140m over two years if the company attracts 5m users).
More than 200,000 songs from Warner’s library will be made available to Lala’s users (300k and growing). LaLa will pay warner a penny each time a song is streamed. Users will be able to buy songs for 99c, without traditional DRM attachments. After downloading a proprietary software client to run on their computers, the music will be stored directly on the buyer’s iPod – bypassing the hard drive. The logic is that by bypassing the drive, the risk and opportunity of piracy is dramatically decreased. (Presumably there are security provisions preventing the use of backup utilities that copy files from an iPod back to the computer)
For Warner, the deal is largely being billed as very low in risk. The basis for those arguments is: first, that Warner has far more influence in setting pricing with LaLa than it does with other online retailers. This will purportedly help them protect their product and better manage their revenue stream; and second, that Warner is promised a constant stream of royalty revenue regardless of CD sales on the site.
These arguments may be a little short-sighted. For Warner to get royalty revenue will require that LaLa is successful in selling product – and a lot of it. $140m in fees spread over 5m users will require each user to spend $28 on music from LaLa to break even. And if only half of the audience buys, and the other half simply enjoys free internet music from the office, the burden will be $56 per paying user.
That per/head costs isn’t outrageous as a dollar value, but it may be difficult to achieve in the extremely crowded digital music market. LaLa will be competing with traditional music retailers as well as (to name just a few) iTunes, Napster, Rhapsody, Slacker, and even internet radio stations like Pandora or Last.fm. If LaLa fails to sell enough music – Warner won’t likely earn much in royalties from the streamed music. LaLa, with only $14m in venture investment reported thus far, isn’t likely to have the capital to pay absent sales.
Still, even if the basis for popular no-to-low risk arguments is flawed, the deal isn’t terribly risky. What will Warner lose then if the gamble fails? Arguably, not a lot. LaLa could be considered a marketing experiment with a revenue kicker. It promotes Warner’s artist’s music, like radio, at the least. If successful, which odds are against, it’ll bring in a nice royalty stream. … which Warner Music could sure use.