The U.K. ad-funded streaming service We7 is to relaunch with a greater focus on radio, like automated recommendation services Last.fm and Pandora.

Two years after its full launch as a streaming service - founder investors included Peter Gabriel, Eden Venture and Spark Ventures - We7 claims 3 million monthly users.

We7 executives have always conceded that it was a challenge to cover the costs of free streaming. But they have been cautious (mindful of the fate of iMeem, SpiralFrog, Lala and Ruckus) and used various levers to control costs, such as increasing the amount of audio advertising users are subjected to and making the registration process more involved.

While Spotify has aimed to upgrade users to premium services, We7 appears to have taken the view that most of its young audience of light users will likely want to stick with the free service. We7 does have premium options including mobile apps, but reportedly has fewer than 10,000 subscribers compared to Spotify's 500,000-plus across Europe.

We7 hooked up with Yahoo this year to drive advertising sales in order to build up the free user base with confidence. In April 2010 it said advertising income covered payments to rights holders for the first time, although that leaves plenty of other costs to cover. The company made a loss of £3.66 million ($5.9 million) in 2009.

"The economic model of on-demand is challenging," CEO and founder investor Steve Purdham tells Billboard.biz.

Nevertheless, despite the obvious commercial benefits to We7 of repositioning to a personalized radio model where the royalty payments will be lower, the company insists it is responding to customer demand. It introduced its radio service at the beginning of 2010 and by September 55% of monthly streams were via this 'lean back' experience.

"We always watch what our consumers do," says Purdham. "This [repositioning] is actually trying to reflect how people are using the service. If I tried to force our users down this route to get the economic benefit [for We7] I would get short shrift."

While We7 has built up a catalog of 6.5 million tracks, it seems that for many the freedom to choose is just too bewildering and that an automatic recommendation system suits their requirements.

Purdham says that last month 63% of all visitors - new and existing users to the site - used the radio function. Of the regular users, 83% took advantage of this function.

We7 will be driving its digital music service towards what it calls 'Internet Radio Plus' and will roll out a series of changes in how it presents the service over the next six months.

The on-demand option will remain for those who want to control their listening experience. But Purdham believes that the popularity of radio on the U.K. means that personalized radio channels - they are triggered by users clicking on an artist, song, album or playlist - can drive the growth of We7. Users can share their personalized station with any of their friends using links to Facebook and Twitter or via email.

"Great pioneering work done by Last.fm in the U.K. and Pandora in the U.S. has shown that the potential is much bigger and we7 intends to go further to deliver real benefits to the next generation of Internet radio listeners," said Purdham.