Apple was engaged in a bidding war with Google when it acquired music service Lala, The Wall Street Journal (subscription required) reported on Friday. That helps to explain why Apple agreed to pay $85 million, a sum that I (and others) believed was far too much for a down-on-its-luck start-up.
What has surprised some in the music sector, however, is that Apple is considering a plan to create some kind of streaming-music service and is turning to Lala's managers to help oversee the new offering. Sources in the music industry I interviewed Thursday gave varying descriptions of what position Bill Nguyen, Lala's chairman and founder, will occupy at iTunes. But virtually all of them said he and his staff will have plenty of influence over the service should Apple decide to go ahead with the plans.
One of the technology sector's most unlikely rags-to-riches stories may be unfolding before our very eyes.
Consider that Apple--the undaunted music powerhouse that altered the way people buy and listen to music and that will likely generate $2 billion in iTunes sales this year--is now seeking help from a group that cast about the digital-music sector for years, swapped out business models multiple times (without ever finding a profitable one), and basically did little to distinguish themselves.
If you're just looking at Lala's performance in the music sector, this is like the New York Yankees' taking advice from the minor leagues' Lehigh Valley IronPigs.
The big question is what can Lala possibly teach Apple about digital music?
From car sales to tech riches
Apple and Lala representatives aren't talking, but here's the first thing you should know about the deal: Nothing is set in stone yet. The Journal reported that the plans are in the earliest stages and may get altered. My music sources said that Apple has not spoken to any of the four major labels about changing their licensing agreement, which Apple would need to do before launching any new service.
To understand what Google and Apple may see in Lala, one must start with Nguyen, the company's jovial founder.
The son of Vietnamese immigrants, Nguyen (pronounced "win") is charming, wild about surfing and is well known as one of Silicon Valley's smoothest communicators. A so-so student who attended but did not graduate from Houston Baptist University, Nguyen started out selling cars but cashed in big in 1999 when he sold Onebox, an e-mail technology company, for $850 million.
Since then, he has started several other companies in addition to Lala, including Seven, a Wi-Fi software firm.
Eric Schmidt's Google charges were trying to get their hands on Lala, but Apple got the company instead.
(Credit: Greg Sandoval/CNET )He is very close to Eddy Cue, the revered Apple exec who runs iTunes. What may be most important about Nguyen is that he has long had plans to take down the MP3 format. (In Apple's case, the company uses the unprotected AAC format) He has often said that MP3, the digital audio format embraced by so many music fans, is on its way out. He believes downloads have outlived their usefullness and that in the future, consumers will store their music in the cloud instead of on their hard drives.
"Will you ever (in the future) use an electronic device if it's not connected or doesn't have a browser?" Nguyen asked me a year ago. "You've got to face it, there's nothing you don't do in a browser."
Palo Alto, Calif.-based Lala started as an online marketplace where users arranged to swap CDs with each other. Lala then began streaming music to Web-enabled devices. The company would scan a users' computer hard drive and then enable the person to access the same songs--provided Lala had the rights--via the Web.
According to a report in The New York Times, Lala had concluded that it wouldn't reach profitability anytime soon and approached Apple in the hopes of making a deal.
The end of iTunes downloads?
The natural conclusion to make here is that by acquiring Lala, Apple may be laying the groundwork for a move away from the traditional song download. If this is correct, it would be stunning in that Apple has built a retail empire by selling downloads.
If Apple is preparing such a plan, that would suit the music industry just fine. Plenty of people at the top four labels have long been uncomfortable with unprotected music files. The major recording companies favor formats that protect music from being copied and shared. Label executives have also said that selling individual songs isn't a good business as the profit margins are small and it's a not a model that can't grow. Nguyen's ideas appealed to many at the music labels, particularly those at Warner Music Group, which invested $20 million into the company.
In May, Warner announced that it had to write down about $11 million of the Lala investment.
Some of the music execs I've talked to say they see a world where music buyers will leap at the chance to buy a song for life. In a world where music is stored on the servers of big companies, a consumer never has to worry about losing a song library to a broken hard drive or lost music player.
Of course, consumers would likely pay a premium for this life-time ownership and cloud-based service, but many in the industry feel that the public is ready for that kind of offer.
By all appearances, Nguyen could be the architect of this vision at iTunes.
Regardless of Lala's shortcomings, the company created something good enough to lure Google and Apple, two of technology's most successful companies. That alone isn't a bad resume.
And when you look at the $85 million purchase price, Nguyen engineered by far the best exit in the the battered digital music sector in at least a year.
There's something else to keep in mind about Nguyen; he recovers from spills quickly, usually in time to catch the next big wave. Hang 10, Bill.
Apple's purchase of streaming music service Lala reportedly represents a shift in the company's iTunes strategy. The aim: Make iTunes more Web friendly.
The Wall Street Journal reports that Apple is looking to give consumers more ways to access and manage iTunes without a download of the software.
The larger questions: Does Apple need to rethink the iTunes model? Is Apple missing a shift to Web listening habits? Can iTunes, the largest music service around, be getting tired?
Those questions can be answered with one word: Yes.
Read more of "Does Apple need to refresh iTunes? Probably at ZDNet's Between the Lines.
Two prominent technology writers are reporting vastly different stories about what Apple paid for music service Lala.
Peter Kafka, from The Wall Street Journal-owned blog All Things Digital, cited anonymous sources in a Monday report who said Apple plunked down $80 million for Lala. In a story published Tuesday, Michael Arrington at TechCrunch cited his own sources who disputed that price and said Lala was acquired for $17 million.
I wish I knew who was right, but my reporting came up with nothing solid. I will say that from the second I heard Kafka's number I was skeptical. After covering the shutterings of Ruckus and Spiralfrog, as well as the sales of Imeem, iLike, and Lala, I can say that the $80 million figure is way out of line with valuations of other companies in this sector.
Lala's service isn't significantly superior to Imeem or iLike, but those companies, according to Arrington, sold for $1 million and $20 million respectively. Lala scanned users' computer hard drives and enabled them to access music libraries stored in the cloud. The benefits of this were complicated and tough to sell to consumers.
I reported on Friday that one reason Apple is interested in Lala is to get its hands on the music service's payment and fulfillment technology, which could save it big money, according to my sources. The company's management and engineering team are well thought of in both music and tech sectors.
Combine all of that and you're still a long way from $80 million.
We still don't have a single profitable player in digital music of any note. The sector is rife with closures and high overhead. There isn't any standalone digital music service, other than iTunes, worth that kind of money.
We might get the truth one day, but don't bet on it. Remember, Apple is in control now and the company distributes information like the Kremlin. One thing we can do is wait to see what Apple does with its Lala assets.
Apple has acquired struggling streaming music service Lala, an Apple spokesman told CNET News on Sunday.
Apple spokesman Steve Dowling confirmed the acquisition but did not disclose the terms of the deal or what the company intends to do with the 4-year-old Lala. The company scans users' hard drives and creates a duplicate music library that owners can access from Web-enabled devices. The company also sells songs for a dime each.
CNET News reported Friday that Apple was close to finalizing the sale and that one of the reasons Apple was interested in acquiring Lala is to obtain some of the company's payment and fulfillment systems, which a source with knowledge of the talks said could save Apple money.
However, it's unclear whether Apple may also be planning to launch some kind of streaming-music or so-called cloud storage feature.
The New York Times reported that Apple was approached by Lala after the company concluded that reaching profitability was unlikely. All Things Digital reported that Lala was acquired for a sum that meant a loss for its investors.
If things keep going this way, pretty soon there won't be any digital music space to cover. Many of the players around a year ago are gone: Ruckus and SpiralFrog closed. MySpace is gobbling up iLike and soon Imeem. Apple got Lala.
The frontrunners now appear to be Pandora, Amazon, Spotify, MySpace Music, Last.fm (owned by CBS, parent company of CNET) and Zune's Marketplace.
To this point, not one of them has generated the kind of market share to challenge iTunes.
I had a fascinating conversation with MediaNet CEO Alan McGlade on Friday morning. Unless you're deeply involved in online music, you probably don't know MediaNet, but it's the back end powering a lot of music services you might have used, including MOG's subscription service that launched earlier this week, as well as Microsoft's excellent Zune Pass subscription service and iLike's online music marketplace. (MySpace acquired iLike in August, and in November, links to iLike's service began appearing directly in music-related search results on Google.)
Fox Interactive used MediaNet's technology to embed this list of Aerosmith songs in a story about the band. Readers could then listen to a sample or buy the song.
(Credit: MediaNet)They've also got more history in online music than just about anyone. The company started off as MusicNet, with part-ownership by three of the then-Big Five major labels: BMG, EMI, and Warner. They powered RealNetworks' music initiatives before RealNetworks bought Rhapsody. They powered Yahoo Music. They powered MTV's online music store.
These early stores went nowhere. Content owners insisted on digital rights management (DRM) restrictions, which meant that content from these stores had restricted use rights and couldn't be played on every device--including, in most cases, Apple's iconic iPod. Setting up a store using MediaNet's platform often took 18 months and significant technical expertise. In the meantime, Apple focused on a dedicated online store for its own devices, and completely dominated the market for music downloads.
But the landscape has changed. Labels don't want to be beholden to Apple. They no longer insist on DRM for single-song downloads, and have realized that the more outlets there are for their digital music, the more customers they'll reach, and the more sales they'll have. (Amazing it took this long to figure out.) MediaNet is, in my opinion, incredibly well positioned to take advantage of this sea change.
In October, the company released a set of technologies called MN Open that make it almost trivially simple for companies to add a wide variety of music consumption options to their Web sites. Sure, companies can still use MediaNet to build an end-to-end service like MOG.
But say you're Fox Interactive and want to make a story about Aerosmith more engaging. Using a MediaNet component, Fox created a link for the first mention of the word Aerosmith that took users to a page with more information about the band, and links to play and buy some of their popular songs. Fox also posted Aerosmith songs in a box directly on the story page.
MediaNet handled all the heavy lifting: licensing the music, streaming the samples, and fulfilling the transaction. Fox kept its brand and design throughout the process, and users didn't have to leave the site to buy the song. Best of all for Fox, it didn't have to make any up-front payment to use MediaNet's technology. Instead, MediaNet takes the customary cut of any song purchased through the site (about 30 percent, if it's anything like Apple). The model's the same for sites that offer free ad-supported streams or subscriptions--MediaNet takes a portion of each transaction, then handles payment to the content owners.
Now imagine this kind of integration on sites for radio stations, record labels, or your favorite bands. Imagine your ISP or cell phone carrier offering you a music subscription service bundled with your Internet service or smartphone. In this world, users won't have to go to iTunes or Amazon MP3, or subscribe to Rhapsody (or MOG for that matter). Music will be available for consumption everywhere. And content owners will get paid regardless of where users buy it.
According to McGlade, it's already happening--he said MediaNet is adding about one new distributor per day, and has already got about 50 customers using the MN Open platform. One site, GetPlaylists.com, was able to add playable song samples and downloads-for-sale in only two days with MN Open, according to McGlade.
Thanks to this upsurge, the company--which is owned by a private equity firm and no longer has any direct ownership affiliation with the major labels--has recently crossed over into profitability. A rare situation indeed in today's online music landscape.
It's a great vision, and something that Microsoft, the original platform company, could have done. But Microsoft spent years pushing the Windows Media Platform, which made heavy use of Microsoft codecs and file wrappers (instead of MP3s, which were becoming the industry standard). Microsoft also spent a lot of effort trying to enable the labels' DRM demands--for example, by building a platform to enable subscription-based downloads to be transferred to portable devices. Then, just as the labels were getting ready to abandon DRM, Microsoft basically gave up pushing Windows Media as a general-purpose platform for distributors and device makers, and instead started trying to mimic Apple's end-to-end software+service+device with the Zune strategy.
Talk about an opportunity lost! Instead of struggling along with something like 2 percent of the digital media player market, Microsoft could have ended up powering the music technology on thousands of Web sites.
Another aside: while MusicNet offers a lot of flexibility for distributors--downloads, samples, free streams, or subscriptions are all supported--McGlade is most bullish on subscriptions as the digital business model of the future. He admits that old fogeys accustomed to CDs and vinyl will have a hard time giving up the concept of ownership, but suggests that today's teenagers don't care--they want music on demand from any device, any time, in any location, and don't need to have the files physically present. McGlade thinks that subscriptions will have the best chance of taking off if they're bundled with some other product, like ISP service.
Scoff all you want about subscriptions, but the concept keeps coming up: music industry expert Donald Passman also believes they're the best chance for the music industry to thrive in the future. Even Apple finally seems to be bending to the idea of streaming music with its acquisition of Lala, although Lala isn't a straight subscription service, but more of an online music locker with some free streams, plus fee-based individual streams.
Is this man unbeatable in the digital-music sector?
(Credit: Ina Fried/CNET News.com)Update 6:21 p.m. PST: The New York Times and Wall Street Journal are reporting that Apple and Lala have struck a deal.
Apple acquired Lala on Friday, unlikely offering much for the streaming-music service.
Sources with knowledge of the discussion told me Apple is interested in bringing some of Lala's engineers onboard. According to the sources, Apple is impressed by Lala's technology. The 4-year-old Lala scans users' hard drives and creates a duplicate music library that they can access from Web-enabled devices. The company also sells songs for a dime each.
I posted a story on Friday about the acquisition talks. Apple declined to comment on "rumor and speculation" and a Lala spokesman did not respond to an interview request.
Over at The New York Times, Brad Stone posted a report citing sources who also said Apple had a special interest in obtaining Lala's engineering talent. But the Times also added this:
"The talks (between Apple and Lala) originated when Lala executives concluded their prospects for turning a profit in the short term were dim," Stone wrote. "(Lala) initiated discussions about a potential investment with Eddy Cue, Apple's vice president in charge of iTunes."
That Lala was struggling to turn a profit is consistent with the kind of bleak news that has come out of digital music the past year. Many of the newer and experimental business models, such as ad-supported music, have flopped. The only reasonable question now is how much longer will this shakeout continue?
We saw Ruckus falter and close in January. We saw SpiralFrog flameout spectacularly in March. In August, MySpace picked up iLike, and sources said that MySpace acquired Imeem last month, but the news has not been announced.
What seemed to be different about Lala is that the company had received positive reviews from the music labels for a long time. Executives at some of the biggest recording companies have told me in the past that they respected Lala's management and its focus on the bottom line. This spring, label execs said they saw some encouraging signs after Lala had revamped the service for seemingly the umpteenth time. It initially made a name for itself by trying to enable users to swap CDs over the Internet. It never went anywhere.
Then came the announcement in October that Google would offer Lala's music to users searching for information on music acts. That could mean a boon said some of the pundits. Apparently, by that time, Lala's fate was sealed.
So, we're kind of right back where we started. The only proven winners in digital music are Apple and download sales.
Michael Robertson, the serial entrepreneur and MP3.com founder, told me earlier this year that it doesn't matter if Imeem, Lala, and their competitors went away because there is always a new crop of players longing to jump into the music industry.
"It's sexy," Robertson said.
In that case, who's up next? Let's see your ideas and technology. Better bring a lot of nerve.
Update 1:32 p.m. PST to include some of the reasons sources say Apple is interested in Lala.
Apple is close to acquiring digital-music service Lala, according to two sources with knowledge of the discussions.
Talks are very advanced, the sources said Friday. One said that the sides have already agreed on terms and have only to sign a final agreement. (Update 6:21 p.m. PST: The New York Times and Wall Street Journal are reporting that Apple and Lala have struck a deal.)
Steve Dowling, Apple's spokesman, said the company doesn't comment on rumors and speculation. A representative from Lala was not immediately available for comment.
Lala is a streaming-music site that sells songs for 10 cents apiece and enables users to store their music libraries on the company's servers. But it has gone through multiple iterations and was once known as a CD-swapping service before reinventing itself as a streaming site.
Exactly what Apple intends to do with Lala remains unclear. Right now, Apple is the largest music store online or offline and has made more money than any other music service by selling downloads. CEO Steve Jobs could start a streaming service, but my sources told me Friday that Apple managers are very interested in working with Lala's engineers, who have come up with "a payment and fulfillment system that could save Apple millions of dollars a year."
In addition, Apple wants Lala's founder Bill Nguyen to come over as part of the acquisition, another source said.
Nguyen is a well-known and respected Silicon Valley entrepreneur who has tried for years to find a music service that is both popular with users (meaning cheap and easy to use) while also generating profits.
According to music sources, the affable Nguyen is also considered my label insiders as one of the more popular figures from the tech sector. Nguyen has typically focused on generating profits as much as whiz-bang technology, which is not always the case with many of his competitors, the sources said.
That said, Lala is not believed to be profitable.
If the deal goes through, it would be the third acquisition of a digital-music site in recent months. MySpace acquired iLike in August and sources said last month that MySpace purchased Imeem.
If Apple is planning some kind of streaming service, the public has shown an appetite for streams that are free of charge and ad-supported.
Many music fans have also clamored for a better way to store music. Right now, most music libraries can be found on an owner's computer hard drive, which can malfunction and potentially destroy thousands of songs. Lala enables users to store songs on the company's servers and access them from Web-enabled devices.
For the last year or so, it's become clear that the economics of ad-supported streaming music services are not good for their creators or investors. As CNET's Greg Sandoval reported last week, the acquisition of streaming service Imeem by MySpace Music for pennies on the dollar is the latest bad news for the sector, following the bankruptcies of SpiralFrog and Ruckus and the similar fire sale of iLike to MySpace.
Offering your music via Spotify might help you fill up your piggybank.
Who's left? In the U.S., we've still got LaLa, which has the blessing of the major labels and seems to be enjoying dramatically increased traffic (as measured by Alexa) thanks to its recent deal with Google, and Grooveshark, which has kept a low profile. Neither of these services is purely ad-supported--particularly LaLa, which hopes to charge customers for downloads and "permanent" streams once they surpass a quota of 50 free streams a month.
But the service most often cited as the future of online music is Spotify. It's only available in Europe right now, but it seems like everybody who tries it loves it, myself included. Spotify offers a premium service as well, which offers portability and higher-quality streams, but the free service offers unlimited ad-supported streams, and that's the service that has everybody so excited.
But there's one small problem with the Spotify-as-savior story: it doesn't pay artists very well. According to this story in a Swedish publication, as translated and explained by the TorrentFreak blog, Spotify delivered more than one million streams of Lady Gaga's hit single "Poker Face" over five months. From these streams, she reportedly earned about 1,150 Swedish kronor--about $167--from the Swedish agency responsible for paying royalties. That's not even enough to cover the cost of four tickets to her upcoming concert in San Francisco.
If this story's true, why would any artist agree to make songs available on Spotify? With these kinds of payouts, it looks like music business expert Donald Passman is right--advertising is never going to support an online music service.
I had a quick conversation with Lala co-founder Bill Nguyen this afternoon, and he filled me in on some of the company's plans to expand its presence in Google's new music search feature. Today, when you search for an artist's name, Google uses mathematical algorithms to determine which songs to display--no editor is involved. But eventually, artists will be able to use Lala's platform to ensure that specific content, such as a new song, shows up in the music search results at Google.
An example of Google's embedded Lala player, which appears on a search for "Joy Division."
Artists and labels will also be able to work with Lala to sell products other than MP3 downloads through Google's search results. For example, Lala is working on a deal with Rhino Records where users will be able to buy vinyl Joy Division records directly from Lala. Eventually, the offer will appear within Google search results on queries like "Joy Division" as well.
For Rhino, this kind of deal is a no-brainer: they're suddenly getting free placement for a relatively high-priced physical product in Google's search results. But it's also beneficial to users: if they buy through Lala, not only will they get the records, but they'll also get all the digital tracks on the LP immediately added to their Lala locker, which lets them listen to those tracks from any PC with an Internet connection. (I've been using Lala's excellent locker service for about a year. Basically, it uploads your entire music collection to the Web, then lets you add additional songs for only $0.10 apiece.) And if users like the deal, then they're more likely to use Google for future music searches. Wins all around.
And that gets me to the most exciting Lala announcement of all: The company has submitted its iPhone app to Apple and hopes to have it approved some time in November. The app will allow users to stream any song in their online Lala locker to their iPhone, over both 3G and Wi-Fi connections. Conceptually, it's similar to iPhone apps from Spotify (in Europe) and Rhapsody, but without the subscription fee; any song you've uploaded to your music locker will be available on your iPhone. And of course, you'll still be able to buy streaming-only versions of new songs for $0.10 a piece. (Lala might charge something like $5 for the app itself, but the company hasn't decided.) I'm getting an early look some time in the next few days. I'll try it and report back on how it works.
How far we've come in such a short time. When I began this blog in 2007, finding a particular song online was an exercise in frustration. You could subscribe to an all-you-can-eat service like Rhapsody, but cheapskates and occasional music listeners either had to dig deep, engage with a questionably legal file-trading service, or settle for 30-second previews from iTunes or one of its Web-based competitors.
Search results for "U2 Beautiful Day" earlier today. The box at the upper-right is an embedded version of the Lala player, which let me play the complete song multiple times.
Since then, as readers of this blog know, dozens of sites offering free streaming music have emerged, from the dead-simple like Songerize and its successor Songite (enter a song title to play it now) to the fiendishly complicated Imeem (whose original user interface gave me a headache, although it's since gotten much better).
But, let's face it, most people don't read this blog. Again and again, nontechnical music fans are blown away when I show them a site like Grooveshark, which lets you play any song, any time, and even arrange songs in queues and playlists. "Is that legal?" they often ask. (Answer: it depends.)
Today, that all changes. Google announced the integration of playable songs into its search results yesterday, and is slowly rolling the feature out to U.S. searchers. I finally saw the feature in action this afternoon, when I ran a search on "U2 Beautiful Day." (You can test it here.)
To an experienced online music listener, the feature seems a little bit random because Google is using both iLike (recently acquired by MySpace) and
Some searches also give you links to Imeem, Rhapsody, and Pandora, each of which offers yet another experience--Rhapsody lets you play up to 25 songs per month for free, Imeem is best for finding unusual versions of popular songs (like live takes), and Pandora requires you to create a virtual radio station based on a particular artist or song, which can be useful for discovering other music you might like, but doesn't give you an instant fix.
Whatever. For the average Internet user, this distinction doesn't matter. What matters: when users go to Google to search for an artist's name, song name, album name, or even a snippet of lyrics, they won't just get random text links or YouTube videos. Instead, the first set of links will be to the audio recording itself--in many cases, the entire song. Everybody knows that there's free music available on the Internet, but most casual listeners don't bother to find it. Now, the most-visited site on the Internet will put it right in front of their faces. As awareness spreads, it'll be another nail in the coffin of traditional music media--why listen to the radio?--and a boon for the five companies who signed this deal with Google. Artists and record labels might also get a shot in the arm, as users discover new music for free and perhaps eventually buy a copy to keep.
As for the rest of the online music start-ups out there? They better be on the phone right now, looking for a benefactor.
