Lala, a digital music service that has experimented with several unique business models in the past, relaunched again this week with a new strategy that has won the backing and content of all four major labels as well as a host of independents.

Like its past efforts, the company aims to let users stream full songs with the intent of upselling them to buying full songs and albums. But instead of creating a free experience supported by advertising, Lala is trying something that’s never been done before. For the first time, the labels have licensed their music as a virtual product that involves no file transfer or usage-based stream. In essence, users are buying permanent rights to a song rather than buying an actual file.

The company has negotiated a deal that allows users to stream any song they already own in their digital music library for free from any Web-enabled device—be it DRM-free, WMA or Fairplay files. Users can also buy a permanent, Web-only virtual copy of any song they don’t already own for just 10 cents. And finally, they can buy and download the actual MP3 file for 89 cents (or 79 cents if they had previously bought the Websong version).

“It is a significant new model, and even more significant as a consumer proposition,” says Michael Nash, executive VP of digital music strategy and business development for Warner Music Group, which is an investor in Lala. “What I think is really interesting is the idea of virtual ownership—creating a value proposition that’s between the sampling of a stream and the purchase of a download.”

Executives at both Lala and the record labels agree that the ultimate goal is to sell the more expensive MP3 file by placing an additional level of ownership between free streaming and full downloads where before none existed.

“If the goal is to get consumers to buy more music, then the existing model of how it’s priced and sold doesn’t work,” says Lala founder Bill Nguyen. “Look at subscription music. They pay for every single song that’s streamed, but they get a fixed revenue from the customer. So if you’re a big music listener, you actually may cost the service more money that it makes. Instead of a streaming access product, think of it as if it were a real product. It’s just virtual. It doesn’t have the bits, but behaves in the same functional way.”

The fear, of course, is that 10-cent Websongs may cannibalize the more profitable MP3 sales. Lala splits the cost of both the 10-cent Websong and the full MP3 with the labels, and makes a greater percentage on the Websong. Since it began testing the system in May with some 300,000 existing Lala users, between 30% and 40% of Websong buyers ended up buying the full MP3.

“Lala is a pure transactional player,” Nash says. “They’re not supporting some hardware platform with this. Our interests are totally aligned with theirs. Part of our comfort in the model is recognizing that we have the same interests to engage consumers in a great experience that drives discovery, monetize that, and drive the value of the consumer by upselling them on downloads as often as that makes sense.”

In fact, it’s the music discovery aspect of the Lala service that makes the model work. The idea is that users will come to the service first for the ability to stream their music collection from anywhere. Lala will then analyze their music collection and recommend new songs, which users can play once for free before they’re prompted to buy either the Websong or the full MP3.

Whether this “virtual song” sales model will catch on very much depends on whether music fans who can get on-demand songs free from sites like Imeem or MySpace Music will prefer the Lala experience enough to concede to a 10-cent fee for each song. That’s particularly true for the e-commerce system governing the micro transactions.

One advantage Lala has over the free on-demand service is a more robust music recommendation feature. It also has the backing of a proven management team. Nguyen is a serial entrepreneur with more than seven successful startups under his belt and an uncanny ability to charm investors, content owners and even the press. Earlier this year it brought on former Yahoo chief product officer Geoff Ralston, who was instrumental in the formation of another “cloud computing” application—Yahoo Mail.

But Lala also has a history of unveiling grand plans that never go anywhere. The company launched in 2006 as a CD swap-by-mail venture. It later bought Internet radio outfit WOXY in part to sell CDs via a “buy” link on the Internet radio feeds. Last June, it unveiled an ambitious effort to pay more than $160 million in upfront fees over two years to let users stream any song they liked for free, in hopes that those users would then buy more CDs. It even tried selling album-only DRM-free downloads that users could download directly to their iPod.

It first announced plans to test the 10-cent streams this May, a move greeted with some skepticism at the time due to the relatively sparse catalog available. But with six million tracks now available from both the majors and more than 170,000 independent labels and aggregators, the service has more industry support than ever before.

Whether this new model will catch on and spread to other new or existing services will very much depend on Lala’s success.

“If it succeeds, other people will look to imitate it and we’ll look to license them,” says Nash. “We’re very excited about this as an innovation and look forward to what the consumer uptake looks like… We think it can work very well, but of course they’re experimenting with a new model so we’ll have to see.”

Ever the cheerleader, Nguyen reserved most of his praise for his label partners that agreed to the unorthodox licensing scheme.

“This is the first time the industry has built a product for where they think things are going, and not reacting to what people have already done.”

Questions? Comments? Let us know: @billboardbiz

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