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.
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.