Lala: music social network

From Wired the story of Lala: from trading CDs to a music social network

Free Music Now! Lala.com's Plan to Give Songs Away Could Upend the Industry
By Cliff Kuang               10.oct.07

Bill Nguyen sold his first company, Onebox, in 2000 for $800 million. Then he built a mobile email provider, Seven, into a multimillion-dollar enterprise, leaving in 2004 as majority owner. Next he did what any unemployed rich guy might do: took vacations in St. Tropez and Vail, went surfing in Costa Rica, acquired a garageful of very fast cars.

One day in the winter of 2004, Nguyen was having dinner in San Francisco with friends Chris Collingwood and Brian Young of the band Fountains of Wayne. They had known each other since the group played a corporate event at Seven a few years earlier. The conversation turned to child-rearing. Come on, they implored, don't let your kid grow up with a self-indulgent dad on permanent vacation. Nguyen replied that he had nothing left to prove in the software industry. Why don't you fix the music industry, then? they suggested half seriously.

Nguyen could think of a bunch of reasons why he shouldn't go near the music industry. CD sales had dropped almost 20 percent since 2000. Peer-to-peer transactions — dominated by pirated media — accounted for almost 60 percent of North American data traffic. Tower Records had just filed for bankruptcy. The industry was in free fall. Yet the more Nguyen thought about it, the more intrigued he became.

Nguyen's complaint with the way music is sold online — whether it's CD purchases or downloads — is that there's no easy, legal way to listen to a song before you buy it. A 30-second snippet on Amazon.com or iTunes is rarely enough to form a good impression and certainly not enough to get a tune stuck in your head. Nguyen's solution: Give the music away. Later this year, his new company, Lala, will begin streaming any track or album the user selects, for free, betting that the chance to explore the sonic landscape will get listeners excited. As they take in artists and genres they might otherwise never hear, music fans are going to want to own the songs, Nguyen says — and Lala will be right there to make that possible, via whatever channel and format the customer prefers: downloading tracks, trading discs, or even (gasp) buying the CDs. It's a model he believes will revive the music industry.

Nguyen started small. Lala.com launched in June 2006 as a membership service that facilitated CD swaps. The site lets music fans list the CDs they own and the CDs they want, and then it arranges trades. Each transaction costs $1.75, which pays for a nifty Netflix-like envelope, 75 cents in shipping, a roughly 20-cent honorarium deposited into a trust fund for artists, and, of course, a fee for the middleman. (Nguyen says he kicks something back to the performers because he values the artistic community. Or maybe he just doesn't want to get sued by musicians who feel they're being screwed.) The arrangement exploits a loophole in copyright law: While distributing duplicates is verboten, it's perfectly legal to trade your own property. (And there's nothing to prevent Lala users from ripping a copy of a disc before they send the original off to someone else.) The site hummed along nicely enough, and in February 2007, Lala quietly added CD sales to its offerings.

But things move quickly when you've got a winning track record as an entrepreneur and know a bunch of VCs who are itching to put their dollars to work. Nguyen soon had seed money to grow Lala into something far more ambitious than a sneakernet workaround of intellectual property rules.

Lala's first major expenditure struck some as bizarre: In September 2006, the company bought WOXY, a legendary indie radio station in Cincinnati, for an undisclosed sum (reportedly just shy of $1 million). The station had turned to Internet-only programming two years earlier; it was in dire financial straits and had just ceased broadcasting. Lala would have access to WOXY's entire catalog — and the right to stream it online. Fans followed the deal in real time as it unfolded: Nguyen announced his offer on the station's message boards, punctuating his opener with a typo: "Hey folks, we'd like to save ROXY." The responses were predictable: "seems kind of strange, to put it mildly"... "*fingers crossed for a miracle*"... and, after readers' Google searches confirmed the entrepreneur's bona fides, "the fit between b.n. and WOXY is ridiculous — in a good way."

Nguyen's idea was to re-create the business model of the music industry's golden age: Hear a song on the radio, then buy the record. Only now it would all take place on the Web. You'd stream a song from WOXY, then click to purchase the CD if you liked it.

The WOXY deal offers a preview of the system Lala will roll out this fall. Starting in November, according to Nguyen, Lala will offer unlimited on-demand streams of music from two of the four major labels (the company's still negotiating with the other two). That music doesn't come free to Lala — the company expects to pay more than $160 million in licensing fees to the labels over the first two years. Rhapsody has a similar arrangement, but it charges users a subscription fee of about $15 per month. Lala won't charge users a penny. Instead, the company intends to recoup those costs through music sales. It hopes to pull in $120 million in the first two years, which works out to roughly $5 of revenue per user per month, Nguyen says. In addition to brokering trades among members, Lala will deal downloads, sell physical CDs, even hock vinyl — and he says more revenue streams are on the way.

Nguyen designed the site to operate like a social network. The lists of CDs you want and have form the core of your profile, and the people you trade with become your "friends." When the software discovers someone with tastes similar to your own, Nguyen figures you'll regularly click on their profile to check out what they have and want. You can even see the music they're streaming at that moment. Users can make playlists and share them, and if they want a broader audience, they can post the lists to groups within the community. The site also features some clever programming to help you expand your sonic palate, providing user-generated recommendations and playlists automatically populated with new-to-you music. All the while, of course, it'll be easy to buy anything you happen to discover.

Discovery is at the heart of Nguyen's plan — the notion that the way to save the music industry is to help fans range widely and explore new artists and genres. Though no other service or retailer shares his exact business model, plenty are working the discovery angle.

"For every Norah Jones there are a thousand artists like her who just haven't been found," says Pandora founder Tim Westergren, whose site streams custom listening channels based around a listener's favorite band or song, using advertising revenue to pay for it. Qtrax, another ad-supported venture set to launch in December, is essentially a peer-to-peer client but says it has inked deals with the four majors. Users will be able to grab any song off the company's network and listen to it for free. And Last.fm, a music-startup success story, focuses on exposing its listeners to new music. Boasting more than 15million users, it was bought by CBS last May for $280 million.

Even Rhapsody is fundamentally a music discovery site. Sure, it charges a monthly subscription fee, but at its core the venture is similar to Lala: If fans can listen to whatever they want, they'll get amped enough that they won't mind paying for downloads or CDs. As Tim Quirk, Rhapsody's VP of music programming, says, "Rhapsody's real value isn't in an unlimited catalog; it's in the chance to stumble on something new."

Rhapsody's parent company, RealNetworks, reports 2.7 million subscribers for all of its music services. Nguyen projects 500,000 registered users for Lala by the end of 2008, and more than 2 million by the end of 2009. Those numbers may seem ambitious, but Lala has something Rhapsody doesn't: that zero price point. David Card, an analyst at Jupiter Research, says Rhapsody charges too much for too little. "Ten dollars per month doesn't sound like much. But it's more than the average listener wants to spend." As a result, Card says, Rhapsody appeals only to "aficionados with broad and deep music interest." Lala is for everyone else.

Everyone else equates to a lot of potential customers, and Nguyen likes his chances of luring them in. Music fans probably will visit Lala — it's free, after all — but the trick is turning that traffic into dollars. And if Nguyen can't turn free music into money, someone else will.