Lala’s big idea turns online music, and iTunes Store, upside down

This week, Lala.com dropped a bomb on the online music industry, and this one is a doozy.

Forget what you already know about Lala and consider this a new beginning for the company. Lala started out as a used CD swapping service for consumers which sounds great in theory, but is actually a pretty bad business in practice. They ditched that idea to become an internet radio company, but the rising cost of music royalties greeted them like the ferryman on the river Styx. Other internet radio companies, including Pandora, were also feeling the pressure. Lala couldn’t take it. They needed something different. Something big. And, this time, they may have found it.

Lala’s new business is built around the concept of a digital music locker. You securely store digital music that you own on their servers. You can then stream your music from any device connected to the internet. Sound familiar? It is, because MP3.com actually had this same idea over a decade ago, well before the world was ready for it.

So why will this idea work this time around? To understand the business model, we must first go back and look at what transpired in the past to see why it will transform the industry today.

MP3.com’s Big Idea Before It’s Time

Rewind to 1997. Venture capital is flowing down Sand Hill Road like the mighty Colorado River in spring time, and internet start-ups are seeking to redefine the music industry. One aspiring company promises digital music lockers where users can store legally owned music on central servers. The company is named MP3.com, after the digital file format for music.

Two years later, MP3.com has a big idea. They introduce a new feature that allows users to register and store their own CD collections in their music lockers and then stream those songs on demand, from the internet. To the company’s founders, this appeared to be a slam dunk. The music was already legally purchased by the consumer, so charging a small fee for the streaming service looked like a new revenue model that everyone could share in.

However, Universal Music Group disagreed. They were like most big music companies at that time, uninformed and lacking vision in all matters related to the internet. To them, MP3.com was enabling consumers with an easy way to make digital copies of UMG’s intellectual property. This was piracy, clear and simple. A lawsuit ensued, and the judge agreed with UMG, awarding them a $200 million settlement which led to the sell off of MP3.com.

Ironically, it was UMG’s parent company, Vivendi Universal, who bought up the assets of MP3.com at a deep discount in 2001. They realized that consumers liked to download music online, and in their own vanity, assumed that a Vivendi branded music service would fly. It did not. Vivendi failed to recognize that music consumers have no affinity to the labels, only to the artists. It was a costly miscalculation.

Give Vivendi credit for being the first big music company to see the internet as a viable distribution channel for music. They saw the potential in MP3.com, but their management was still mired in old school practices and could not grow the service. They dismantled the service in 2003, selling the MP3.com domain name to Cnet where it still resides today.

File Sharing Challenges Big Music

During all this, another little company called Napster quickly grew to monstrous proportions. Napster’s file sharing service provided the fastest, easiest, and cheapest way for consumers to acquire free music. It scared the pants off of big music companies. It was a block party and the big music companies were not invited.

Napster was flagrant in its disregard for copyright, rubbing it right in the face of big music, making them look like fools to the 25 million users of Napster. In 2000, big music lawyers crashed the party, and turned the lights out at Napster. But the genie was already out of the bottle. In Napster’s wake, many more file sharing networks burst online, the larger ones attracting the attention of big music lawyers. Some networks were brought down in court, others voluntarily closed shop fearing long, expensive legal battles.

Apple Turns Big Music Into Believers

While big music lawyers were busy running the riff-raff out of town, another interesting thing happened. Steve Jobs had also been busy, only he was out serving the Kool Aid to Hollywood media companies, and they were drinking it. He had successfully secured distribution deals with Hollywood that would eventually transform Apple from a computer company into a media company.

Some say Steve Jobs was born with a horseshoe up his ass because lady luck seems to follow him where ever he goes. He gets fired from Apple, the company he co-founded, starts a new company called NeXT which he sells back to Apple for $429 million and steps back in as the CEO. Oh, and don’t forget about his little side project, a small computer graphics company that he acquired from Lucasfilm in 1986, and then built it into the world’s leading film animation company, Pixar. He later sells Pixar to Disney in 2006 and becomes the single largest individual shareholder of Walt Disney Company and gets a seat on their board of directors.

Others attribute Jobs’ success to a reality distortion field, a magnetic charisma combined with a keen sense of predicting customer desires. Whatever it is, he’s got it. And he used it to quell big music’s fear of online music distribution. No easy feat. Perhaps big music was just plain tired of fighting and ready to side with a technology giant like Apple. After all, if Apple couldn’t make it work, who could?

Apple had a new kind of portable music player that could connect to an online marketplace so users could buy and download music. Jobs convinced big music companies to let Apple sell individual songs in iTunes for .99 cents each. Apple released the first iPod in 2001. Two years later the iTunes Store was launched, and the rest is history.

Lala Breathes New Life Into The Big Idea

Lala’s new music service is a reincarnation of MP3.com’s online music locker, but this time around, the concept seems destined to work. Why? It’s hard to identify the tipping point when Hollywood decided to embrace the digital music era, but one cannot argue that Steve Jobs played a leading role. He convinced big music to dip their toes into the iTunes Store. The water was perfect. It didn’t take long for big music companies to join Apple swimmingly, selling songs online to iPod owners everywhere.

Hollywood’s turnaround, combined with the almost ubiquitous presence of broadband internet today, is a recipe for Lala’s success where MP3.com had failed. Unlike MP3.com, Lala has the blessing of the big music companies to sell store music in the cloud, and even cheaper than Apple. This puts Lala squarely in competition with the iTunes Store, but there’s a twist. Lala has added a few game changing features that will have Apple scrambling to play catch up.

Here’s How It Works

Lala currently offers over 6 million songs. You can listen to each one, or an entire album, one time for free. If you wish to purchase a song you have two choices. You can pay a scant .10 cents per song which you can play from your online music locker as many times as you wish. Or, you can download a song as an mp3 file for .79 cents each, 20% cheaper than iTunes. And you get the first 50 songs absolutely free.

If you only care about accessing your music from the internet, then you’ll only ever need to spend .10 cents per song to have the right to play it whenever, where ever you wish. This is perfect for home media centers with internet access. If you’ll need to play the song on an iPod or other device that doesn’t have access to the internet, then you download the mp3 for .79 cents and you’re good to go.

Lala also offers a killer feature called “Music Mover” that scans your music collection on your computer. If Lala owns the rights to a song that exists in your personal CD collection, then it adds it to your locker and you can listen to it for free, anytime. Now that’s fair use.

Steve Jobs knows better than anyone that a big idea will only get a company so far. The company must be able to execute the big idea to create a killer product, and Lala’s execution is superb. The interface is beautiful in its simplicity. It’s easy to buy music, or add your own collection. And once you get your music into your online locker, the Lala player starts to feel like iTunes running in your browser. Lala also adds in a few nice social features that let you explore and discover music from other Lala users.

Lala’s iPhone App

Lala has also submitted an iPhone app to Apple which is awaiting approval before it shows up in the App Store. Cross your fingers that it gets through the approval process instead of getting the famous iPhone app rejection from Apple, duplication of functionality, users may get confused. Far fetched? We wouldn’t put it past Apple, especially if they sense Lala impinging on their fastest growing revenue stream yet, the iPhone and App Store combo.

The good news is that Hollywood is finally waking up to the web, and it’s clearly evident in its support of Lala, Apple, Hulu, and other emerging media distribution channels. Hollywood has a habit of recycling old material. Perhaps internet business models are no different. After all, Lala is recycling MP3.com’s concept and appears to be on the verge of a blockbuster hit. So what’s next? An big online store for pet supplies? Groceries delivered to your home? Maybe there’s gold in them there hills of the dot-com flame outs. Entrepreneurs, grab your picks and shovels and and head for the hills.

Lala is the perfect example of a company that took a big idea from the dot-com era, and not only made it better, they made it work. Lala’s new business model leverages the pervasiveness of broadband internet along with the latest lovefest between Hollywood and Silicon Valley. We think they’re on to something really big here, and once you try Lala for yourself, you’ll know why.

Lala – All the music you could ever want [web]

 

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