The music industry’s attempts to create its own digital distribution business is like a bad horror movie. It just keeps coming back no matter how badly bludgeoned it gets. Back in 2001 in response to Napster, the music labels launched two competing music download sites, PressPlay and MusicNet (the latter became a white-label music service called MediaNet. Meanwhile, Pressplay was bought by Roxio, and formed the basis for the current version of Napster). Both were utter failures.

Then in 2007, in response to iTunes, Doug Morris at Universal Music had the brilliant idea of bundling music subscriptions into the price of digital music players. The effort was called TotalMusic, and the idea was to get all the record labels on board, until the Department of Justice launched an antitrust investigation that killed the idea. Or so everyone thought.

Multiple sources in the Web music industry (including two CEOs and another executive) have told us that the music labels are mulling over another attempt at creating their own digital distribution business, or at least one they can control. Details are sketchy, but the buzz is increasing around a project to create a free, advertising-supported streaming service that would be licensed or white-labeled to other Websites. Each stream would link directly to a paid digital download. Some believe that a revived TotalMusic and this project are one and the same.

TotalMusic, Like, Totally Doesn’t Want To Die

Indeed, TotalMusic lives on, although in a different form. A search on LinkedIn for “TotalMusic” returns four people who list it as their current employer (Ted Ferguson, Troy Denkinger, Robert Broome, and Derek Reeve). All four live in Chicago and all four previously worked at MusicNow, another music service that changed hands between Circuit City, AOL, and ultimately the new Napster (not a good omen). A couple job listings, like this one posted on July 15 for a senior software engineer, describes TotalMusic as being based in Herndon, VA (near AOL old headquarters):

TotalMusic, LLC is a new digital music platform offering the integration of music discovery, streaming and downloads into a wide variety of online and mobile environments. We have solid financial backing and a staff with decades of combined experience in online music.

Compensation is competitive, and the work environment is highly distributed with most members of the team telecommuting, however, our Headquarters is located in Northern Virginia, and have a group in Chicago and Boston. So if you prefer an office environment, Northern Virginia should be your choice.

Free, As in Music

The idea of combining ad-supported streaming with paid downloads is very similar to the upcoming MySpace Music (due to launch next month), except that it will be available to other sites. In that sense, it is closer to what Rhapsody has done, powering music streams for Yahoo Music, iLike, and MTV.com, and trying to up-sell full subscriptions or paid music downloads.

Full-track, on-demand, advertising-supported music streaming (as opposed to randomly-sequenced Internet radio) is gaining steam as a business model. The music labels have licensed their catalogs for uninhibited streaming to imeem and MySpace Music. And a number of other sites, including Lala and Last.fm, have signed more limited deals that still provide access to a broad range of artists. For example, Rhapsody offers a limited version of free streams (25 songs a month) to their songs.

What the music industry should do is make music streaming free. Treat it like a marketing expense to sell digital downloads, concert tickets, and other items. That’s probably not going to happen. But what could happen, and what Web music startups are hoping for, is for the music industry to lower its licensing fees for streaming music.

Or At Least Disruptive Pricing: The $1 CPM

Right now the going rate for streaming music is a penny per track, which comes to an effective CPM (cost per thousand) of $10. That means that music streaming Websites need to be able to charge more than $10 CPMs just to cover the music licensing. And $10 CPMs are not economical. A $1 CPM would make more sense.

As one music startup CEO says, “The only guys who have negotiated terms are guys who have gotten sued.” That is certainly true for imeem and MySpace. With others, the threat of a lawsuit might have been enough to bring them to the table. Although, interestingly, as part of its deal with Warner Music or some time after, imeem received a $15 million investment from Warner, it was revealed today in Warner’s quarterly SEC filing. (Warner also invested $20 million in Lala).

Yet even imeem—which attracts 26 million unique visitors a month to its site, according to comScore, and claims 70 million to 100 million total uniques if you add up its widgets all over the Web—does not expect to make money based on ads related to streaming music alone. It is trying to create a bigger experience that includes videos and photos, and sells other forms of display advertising and sponsorships. MySpace Music, similarly, has its own economies of scale.

For everybody else, offering on-demand streams won’t become feasible until the licensing fees come down. Whether or not TotalMusic is the answer they are waiting for remains to be seen. But don’t count on it. Industries are rarely able to disrupt themselves.

Horror Stories Tend To End Badly

Another, more sinister strategy could be to simply continue to make life difficult for other music streaming services, and let TotalMusic come out with its own a cost-advantaged model. This would be aimed squarely at iTunes as well.

Although it is actively being developed with a rumored time horizon of three to six months, TotalMusic could end up being just a hedge. One source believes the project has yet to receive the final green light from the music-label bosses.

And even if TotalMusic does launch with a disruptive economic model, there are still the antitrust issues to deal with. Since there are only four major music labels, anything that smacks of price-fixing or collusion will be torn down by the Justice Department. The labels need to be very careful about this. (One story I heard: when MusicNet was forming itself among the record labels, it had to rent out an entire hotel floor with a different label in each room, and the lawyers had to go from room to room to seal the deal because the music companies couldn’t be in the same room together).

TotalMusic needs to get around the collusion issue somehow, while still offering a comprehensive catalog. The music industry is desperate to figure out how to shift from physical to digital distribution and it will just keep trying things until it is all spent out. But like any good horror movie, there will always be another sequel.

(Photo by darkpatator).

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Just launched: LaLa is offering users the ability to listen to an unlimited amount of on-demand streaming music, for free, marking the first time this has been available legally. Their new tag line is “Play albums on demand, buy the ones you love.”

We wrote about this product a week ago, although the final launch product has additional features we did not cover in that post. The service is available here.

The company is pursuing music licensing deals with labels and will make music available as those deals are closed. Warner Music is their first partner, and will make their full digital catalog available.

The new LaLa is aimed squarely at iTunes. Users can listen to full songs as often as they like. They can buy the physical CD with a couple of clicks, or they can (in a week or so) download the song. The songs are DRM-free, but are downloaded directly to the iPod. The only way for a user to then remove them is to hack the iPod. So while the songs do not contain DRM, the user is effectively barred from consuming the song cross-platform. The company says that future versions of the service will allow CD burning as well.

Prices for song downloads will be $0.99, the company says, but will vary for high-use users. If you listen to a lot of music on LaLa and participate in the community, song prices will be lower.

The digital tracks will be watermarked .aac files. They won’t stop you from transferring the songs to friends iPods, but the service will only allow one licensed copy of that watermarked file to work on Lala at a time.

The service launch is part of huge bet Lala is making on the future of online music. Licensing fees alone are expected to cost the company $140 million over the next two years. They’ll need an average revenue of $65 per user per year to cover the cost. But Lala sees the new service as an essential update to the way we experience and purchase music.

Lala’s bet is based on two beliefs: people want to own their music, and they want to sample it in the most interactive way possible. They saw the radio’s passive sampling experience evolving into Napster’s on demand experience. But Napster was illegal, and didn’t let you easily sync music where you wanted it. Lala’s new service promises a higher quality and more comprehensive service than has ever come before.

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LaLa is making a very big bet on its business - it will offer users something they’ve never had (legally) before: free, legal, on demand streaming music.

LaLa already runs a cd swapping service and recently started to let users listen to live concerts on the site.

Now they are going to let users listen to on demand music on the site in addition to its other services. There are a number of paid services that do this already, and a handful of flat out illegal ones as well.

This is an extremely expensive business - unlike services like Pandora that have to pay only a fraction of a cent when they play a song (and it still hurts them), on demand streaming rates are more like $0.01 per song. That works out to an average of $0.17/user/hour, and there is no way to cover those costs with advertising alone.

It’s also much more difficult to work through the legal mess to offer this kind of service. Unlike Internet radio, which is covered by the DMCA and which has rates set by regulation, there are no laws to cover on demand streaming. LaLa must negotiate directly with the big labels. The one-cent per song I mentioned above is an estimate by an industry insider of what Yahoo and others pay. Labels can charge more or less than this, and they also like to get a minimum fee per listener/month of around $6. Unless LaLa puts listening restrictions in place, heavy users will go way beyond that. Our understanding is that the labels will also only negotiate one year deals, and if they see any profit on the table at the end of the term they will grab for more.

So how will LaLa cover its costs? The company says they are going to sell CDs to users. Like a song? Click a button and get it sent to you. They say that if they can get each user to buy one CD per month on average they will break even. That may be true, but the average music buyer in the U.S. buys two CDs per year. So LaLa will have to get heavy music buyers to the site to move that average up.

The company has been working on this for some time and is reportedly still in negotiations with labels to get the rights to music. Last year they took over an Internet radio station and began selling CDs to listeners based on songs they like. Hopefully they have enough data to prove their model out.

LaLa raised $9 million in capital from Bain and Ignition Partners.

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Lala.com, the $1 CD swap service, has added another feature to their music community site, live and recorded concert casts. The concert casts can only be listened through an embedded player on Lala. Each cast is made by specific partnerships with bands and the venues they play. The first such concert was Aimee Mann’s Holiday Show on December 13th at Bimbo’s 365 Club in San Francisco CA, USA. The recorded version is available through the front page of their site or here. The comedy of “Best Week Ever”’s Paul F. Tompkins and spontaneity of a live show really make it an entertaining listen. The next live show will be a concert by Rolling Stones keyboardist Chuck Leavell and the Werewolves in a benefit concert for Bay Area kids music programs. In the coming months they will be incorporating more venues and bands and a networking of sound booths across the country to make live recordings for recently acquired WOXY.

The free live shows are a great addition to the site and join their other four offerings: terrestrial radio, citizen radio, music swapping, and new music sales. The backbone of their site still remains CD swapping, though. For a deeper description of the service see our previous coverage. Their internal numbers indicate they have 300,000 registered users and conduct 12,000 CD trades a day, with 30% of their revenues consisting of new music sales, and are cash-flow positive.

We had originally likened Lala to Peerflix. However, Lala differs from the movie swap site in that they have gone to great lengths to not only be a marketplace but to also build a community around enjoying music, similar to the way Yelp has built a community around reviews. Along this line of thought, Lala’s John Kuch says their goal is to “democratize the discovery and distribution of music by putting it in the hands of the people”. The sentiment is that experiencing and interacting with music is key to people’s purchasing habits. They struck out on this path in several ways, incorporating social networking features into the account, bringing terrestrial radio to the internet (mostly independent radio and their crown jewel WOXY), and finally allowing an expanding group of beta users to create their own radio stations.

To start streaming user generated “citizen” radio stations, Lala had to jump through several legal hoops left over from the days of terrestrial radio and the DMCA. Stations’ playlists can be no shorter than three hours before they repeat a song. You can only place two songs from any artist on a station. You can’t listen to your own station with the login you used to make it. Each play of a copyrighted track also means a payment to the SoundExchange. While meeting those conditions, you can join their over 400 other citizen stations by creating a playlist of songs from their internal archive of 1.8 million albums add in your own recordings via plugin.

Lala’s continued focus on creating community through adding more ways to experience and talk about music makes it an interesting play in my mind.

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In a bizarre amalgamation of virtual and physical business, the dying independent terrestrial turned internet radio station WOXY is being revived by online CD swapping service Lala. Lala is tangible evidence that online music doesn’t have to kill the CD industry. At first I was skeptical, but after spending more time on the site I think this radio strategy is very smart. See also our previous coverage of the company here.

Lala users identify CDs they want mailed to them for $1 plus 75 cents shipping. Other users who have those CDs available for swapping are notified and put them in the mail. Lala keeps the dollar and donates a portion of it (as much as $50k in a month so far) to a Foundation that supports artists. Users can also chose to purchase CDs for immediate delivery.

Now the company is taking over WOXY to allow users to create streaming radio stations that will in turn inspire CD swapping and purchases. Station listeners can click to request a swapped or purchased CD that a streaming track originates from. The music available for creating the radio stations is licensed from a third party. Lala plans to invest between $5 and $10 million into the station. The company received $9 million in funding from Bain and Ignition last year.

It appears that Lala is quickly gaining traction with users. The company reports about 10,000 CD swapping transactions per day. Comments left on the site appear in numbers that many publishers would be envious of. The company says CD sales have been doubling monthly and hit gross margin profitability last month. Only 2% of CD swapping transactions result in complaint reports and users are rated in a karma system.

Perhaps the strangest thing about Lala is a delusional, yet legally required, request that participants delete digital copies of music from the CDs they mail away in swaps. I’d be curious to see how often that happens.

Internet radio licenses open a number of interesting, if legally tricky, possibilities like this. See also Faces.com, (our coverage) an Australia based social network that combines user playlists, online music sales and an internet radio license. (Disclosure: Faces is a TechCrunch sponsor.) See also our coverage of Swaptree if trading physical objects is your thing.

I think I like Lala, though the integration of CD swapping, music purchase, internet radio and DRM compliance is taking a while for me to wrap my brain around. Apparently that’s not the case with Lala’s growing user base though. This is definitely a company to watch.

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Palo Alto based lala made a splash by announcing their landing page on USA Today. Lala is a new service, set to launch this summer, that allows people to swap physical CDs.

It looks to be exactly like Peerflix but for CDs. You will tell lala what music you have. Other members can request it from you, and you send it directly to them using a postage-prepaid envelope supplied by lala. They charge $1 for the swap, and $.20 goes directly to artists.

You aren’t supposed to send copies of CDs (originals only), and lala asks that you do the “right thing” and remove songs from your iPod or PC once you’ve sent a CD to another member. While I’m all for the revenue sharing with artists, pleeeease, lala, get over yourself and drop the condescending, do-the-right-thing-as-defined-by-the-RIAA messaging.

I have never written about Peerflix - I am a former member and was deluged in spam from the service and never found anything good on the site to request (people keep the good stuff and put little known movies into the service). My hope for lala is that they get much better inventory from users and don’t try to enforce the “no copies” rule too strongly. These will be very difficult things to do.

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