Digital Media

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.

Vevo CEO and President Rio Caraeff more or less confirmed on Wednesday my suspicion that the music service was not created to serve a new need for consumers. Rather, it was built to help advertisers and content owners (including labels, artists, and music publishers) capitalize on music videos, and to help Google (YouTube's owner) offload some of the cost associated with administering rights to them. In other words, this isn't a business-to-consumer play, it's more of a business-to-business arrangement.

Vevo's launch glitches appear to have been resolved.

(Credit: Vevo)

As he put it: music videos are popular online, fans like them, and content owners think of them as premium content. But they're too widespread, appearing on YouTube, AOL, and many other sites, and the user experience is way too varied--when a user searches on a song name at YouTube, they might get multiple copies of the exact same music video, plus user-posted remixes, live versions shot with a cell phone camera, and even parody versions. More generally, music videos grew up as a promotional tool for albums, and advertisers and users have come to see them as a commodity rather than prime product. Consequently, advertisers haven't been willing to pay much to place their messages next to them, and online music videos have lost money at a "staggering" scale.

Vevo is meant to provide an online clearinghouse for label-approved music videos--the kind of professionally shot videos that often cost half a million dollars or more and used to form the backbone of MTV. Vevo will be the exclusive distributor of these videos, and will handle all licensing and ad sales, although partner Google is handling the actual video hosting and streaming. In other words, if you're running a video site and you want to post a video that's in Vevo's catalog, Vevo will be your only source. By enforcing scarcity, giving advertisers a central place to buy ads, and controlling the user experience--for example, ensuring that there aren't many copies of the same video on YouTube--Vevo believes that advertisers will be willing to pay much more to appear next to these videos. So far, this seems to be true: according to Caraeff, advertisers have been willing to pay between $25 and $40 per thousand views (CPM, in advertising parlance) for Vevo-provided videos, compared with average market rates of $3 to $8. Caraeff claimed that artists and publishers will get about 50 percent of all revenues from these ads--a much higher percentage than they earn from recordings. This is why Mariah Carey and U2 were so excited about the launch.

Interestingly, Vevo will also curate unlicensed videos. For example, if somebody creates a remix of a Beyonce song with an associated video, and it becomes a runaway hit, Vevo might try to claim the video, add it to the Vevo catalog, and handle licensing for its content owners. Caraeff claims they're not going after the home video of your dog skateboarding to your favorite song, but professional-looking videos that have never been claimed, and therefore aren't making any money for anybody. (YouTube doesn't sell ads against unclaimed content for fear of copyright liability.)

So what's in it for Google? Simple--although YouTube has tons of viewers, it also has more inventory than it can sell advertisements against. Licensing for music videos is complicated, and not in Google's core area of expertise. Google is happy to hand this task off to Vevo and accept a lower percentage of advertising dollars because it believes the cost savings and higher CPMs will eventually make business sense.

Finally, about the botched launch: As Caraeff explained, Vevo was basically a B2B play, and the company didn't expect many users to visit its site on the first day. But the publicity created by the big launch party drove massive interest, and the company got more traffic in its first hour than it expected for its entire first year. For what it's worth, the company has added 32 servers in the last 24 hours, and I'm now able to get videos to play on the site with no problem.

In addition, Vevo didn't think it was critical to launch with a full complement of content--remember, it's mainly a back-end and clearinghouse for YouTube and other sites, and if you were watching videos there yesterday, you'll still be watching those same videos there tomorrow (as long as a takedown notice hasn't been issued). So Vevo launched with only about 15,000 videos from Sony and Universal Music. In January, it will add about 30,000 more from EMI and several independent distributors.

I still don't understand why they launched Vevo.com as its own Web site, but at least I understand the thinking behind the company. It won't change my behavior--I'm still going to YouTube, and if a video happens to be provided by Vevo, I'll know that the artists are making some money from it. Fair enough.

Vevo, the new music-video site operated by Google (which owns YouTube) and co-owned by three of the four major labels (EMI, Sony, and Universal; Warner Bros. not participating), launched on Tuesday to some fanfare in New York. Big music celebs rubbed elbows with Google and label execs in the kind of self-congratulatory bash that only the entertainment industry can pull off.

This is as far as I got when I tried to play U2's video for "Even Better Than The Real Thing" on Vevo.

Maybe that's too harsh, but I visited the site on Wednesday and I quite honestly can't figure out who or what it's for. It's got music videos, but only from three of the four majors and some independent distributors, which leaves huge swaths of the entertainment landscape blank. As far as I could tell from a search of the site--and the search engine should work, given that Google's behind the site--Vevo is sadly lacking in classic rock and modern indie rock, which are the two genres I listen to most.

There's no Roger Waters or Pink Floyd. No Pixies. No Grizzly Bear. No Led Zeppelin. No Animal Collective. No Beatles. No Eric Clapton. And on and on and on. Go ahead and try your own, you'll get the idea--if you can get the site to work to work at all. (It's been plagued by glitches since launching, and my effort to play U2's "Even Better Than the Real Thing" around 1 p.m. Wednesday met in failure--the video froze around 80 percent loaded.) Apparently, if you can get a video to load, you'll probably have to watch a video advertisement before it starts.

The aforementioned artists are all over the place on YouTube--a site that everybody knows and loves and is largely free from video advertisements. And because Google is behind both sites, videos licensed for Vevo will also appear on YouTube, with Vevo getting the credit (and ad bucks) when a YouTube viewer watches a Vevo video. So why would anybody go to Vevo? Why bother building it, instead of just making it a new channel on YouTube? Who is this for?

The music industry, that's who. It wants to control the online music video experience--Universal Music Group CEO Doug Morris flat out said so. They're tired of mean old Google using its content to sell advertisements. But I honestly can't imagine why Google agreed, unless the labels held it over a barrel, refusing to license their content for YouTube unless Google agreed to help them create a music-industry answer to TV-streaming site Hulu.

Here's the thing. The big winners in the old music industry of yesteryear don't like the Internet. U2 manager Paul McGuinness has said that Internet service providers should bear part of the blame for piracy. Doug Morris earned some scorn two years ago for a Wired interview in which he revealed that his label didn't even try to come up with a digital strategy in the early days, when P2P file-trading networks first started becoming popular.

If you don't like the Internet, you're not going to be able to create an Internet service that people like. More than 15 years into this Interwebs thing, some people still don't understand that if they create an experience that users don't like, it won't get used. It's like they're still living back in 1973 when we only had three TV networks and one or two daily papers and a handful of local radio stations. We now have unlimited choice. Offer me something better than what's out there now, or please, save yourself some money and effort and get out of my way.

Hulu succeeded not only because the TV companies played hardball, refusing to license their content too broadly to other distributors, but also because it launched strong, with a big selection of desirable content. Vevo could certainly turn itself around, but its launch doesn't look very promising. I suspect it'll end up like every other entertainment industry effort that offers no clear benefit to users: on the digital scrapheap.

Google CEO Eric Schmidt celebrated the launch of music-video site Vevo in New York and he doesn't appear worried that his company might be helping create a future YouTube competitor.

(Credit: Greg Sandoval/CNET )

NEW YORK--Eric Schmidt's presence at a swanky music industry gathering was an illustration of how far digital technology has come and the power it has amassed.

A decade ago, the film studios and top record companies dismissed Northern Californians as a bunch of bearded dweebs who liked electronics. Five years ago, with illegal-file sharing spinning out of control, the entertainment industry looked on techies with fear and loathing, invaders to be repelled before they made off with the treasure. It wasn't that long ago that some in Hollywood considered Google a "rogue company."

Pfft. That's all in the past. On Tuesday, at a launch party for music-video site Vevo, the Google CEO was an honored guest. Schmidt was seated front and center in an area reserved for music industry titans and major recording stars. He rubbed elbows with singers Shania Twain and Sheryl Crow. He chatted up record producer and label exec Jimmy Iovine. He sat and visited with Doug Morris, CEO and chairman of Universal Music Group, the largest of the four top recording companies, as well as the chiefs of Sony Music Group and EMI.

And why shouldn't they show him some respect? Not only is he at the helm of the most successful advertising company in the world and operating YouTube, the Web's No. 1 video site, but Schmidt is also helping to get Vevo off the ground. Instead of trying to stand in the way of a music-video site that is in many ways breaking away from YouTube, Google is providing the service with technological expertise and allowing it to continue to market to YouTube's massive following.

What's that? Google booked $21 billion in revenue in 2008. How can a company like that be satisfied to play rhythm guitar in someone else's band?

Bono, Lady Gaga, Schmidt at Vevo bash (photos)

At the Vevo party, Schmidt said Google couldn't be happier with the situation. This is what he's done for over a year now, held out his hand to big newspapers, film studios, TV networks, and book publishers. By taking a backup role in Vevo, Google sends a message that the rogue image is garbage and the company is prepared to go a long way--even give up decision-making power--to help partners grow their businesses. No threat here.

In many entertainment circles, that message may resonate, especially the ones where the digital revolution has laid waste. Some of the celebs at the Vevo launch were only too happy to tell Schmidt and everyone else how badly recorded music has suffered.

"We've come here to mourn the death of an old cash cow that was the music industry," U2's Bono told the audience during his speech.

"Let's hope Vevo can help salvage something that used to be amazing," said singer Mariah Carey.

If you're anti-copyright and this makes you long for the days when Google and YouTube used to wave the Digital Millennium Copyright Act in the faces of Viacom, NBC Universal, and others that demanded YouTube remove unauthorized film and TV clips from its site, well, it's time to move on.

For more than a year, YouTube's strategy has been to strike partnerships with the top studios, record companies, and TV networks.

Doug Morris, Universal Music Group CEO and the man who came up with the idea for Vevo, waits to shake Schmidt's hand at the Vevo launch party.

(Credit: Greg Sandoval/CNET )

YouTube has content deals with MGM Studios, Sony Pictures, Lionsgate, CBS (parent company of CNET), and all four of the major recording companies.

What probably drove Google to take a softer stance was competition. There might have been a period a couple of years ago when Google could have easily morphed into a video-on-demand service, offering feature films and TV shows and been all things Web video. But it played hardball and NBC and News Corp. successfully came up with a YouTube alternative: Hulu.

The competition between the companies to obtain premium films and shows has been fierce. After pursuing a deal to get full-length content from Disney, Google saw Disney sign with Hulu. That was a bitter blow. Google isn't used to losing.

At the same time, Netflix has jumped into the fray. The Web's top video-rental service has deals with makers of set-top boxes that enable customers to watch streaming Internet video on their TV sets. Apple has a slice of this market as well.

Meanwhile, Hulu could have tried to woo the music labels away from YouTube. Hulu could try to capitalize on any lingering distrust of Google at the labels. Conspicuously missing from Vevo's launch party was Warner Music Group CEO Edgar Bronfman. A feud between Warner and YouTube led to Warner's content being pulled from the video site for nine months before the companies made up. But Warner has so far declined to join Vevo.

In addition, EMI recently penned a music-licensing deal with Hulu. EMI clips will appear on both Hulu and YouTube.

In his speech introducing Vevo, Universal Music's Morris was generous in his praise of Schmidt and Google. But the former songwriter also raised questions about who he was referring to when he said things such as "the best thing about Vevo is that it's our platform" and "no more middlemen" and "we can experiment with anything and everything we want. We don't have to ask anyone's permission anymore."

Here's an interesting study in contrasts. When MySpace acquired iLike back in August, MySpace left the site mostly intact. The iLike home page is still there, you can still add iLike's music-finding and sharing application to your Facebook page, and iLike is given prominent placement in Google search results for music-related queries, thanks to an October deal between MySpace and Google. (That deal also included several other companies.)

What else do you need to know?

(Credit: MySpace)

On Tuesday, MySpace completed its acquisition of Imeem, a service that used to let users upload music and videos and share playlists. In the press release announcing the finalization of the deal, MySpace noted that it will be "working as quickly as possible" to migrate "aspects of" Imeem to MySpace Music.

What does that mean? As of Tuesday, it means that Imeem's gone. Imeem.com and my personal Imeem profile both redirect to MySpace Music. The press release promises that MySpace will "be working to offer users the Imeem playlists they've created on MySpace Music," but the phrasing on the FAQ doesn't leave me much hope--"will attempt to transition" leaves a lot of wiggle room.

The free Imeem app for iPhone is still in the iTunes Store, but it's going to be inoperable until MySpace pushes an update out, and there's no telling how close the new app will be to the old one.

I always found Imeem a little confusing--especially in its early days--but I did like its user-contributed content model, which gave it a large selection of music, and I personally used it to post a lot of recordings from long-dead bands I used to play in. But I suspect that user-contributed content is one reason why MySpace is treating Imeem so differently than it treated iLike: some of that content may not have been properly licensed from content owners. In contrast, MySpace boasts that its content is "fully licensed."

Unfortunately, using MySpace Music is still a pain. It's gotten a bit better since the last time I took a close look, but I still can't find the home pages for certain artists using the MySpace search engine (Google works), the advertisements are still annoying and intrusive (text ads above search results; audio ads on a music site), and there are still no playable Led Zeppelin tracks. (Although MySpace does have The Beatles and AC/DC, which most other services don't.)

There's no free lunch, and the recent consolidation among free online music sites is beginning to look like a crackdown.

On August 1, 1981, a cultural and entertainment juggernaut flickered onto TV screens and rocketed out of obscurity with these six words: "Ladies and gentlemen, rock and roll."

With that, the iconic cable network, MTV, was launched and a popular entertainment category--music videos--was born. Now, 28 years later, MTV has largely abandoned the genre and the record industry is preparing for the debut of a possible successor.

On Tuesday, video start-up Vevo is scheduled to launch. Supported by three of the top four largest record companies (sources say EMI has agreed to provide content to the site) and backed by the technological muscle of YouTube, Vevo is a Web site that will feature videos from many of the world's biggest recording stars, including U2, Cold Play, the Black Eyed Peas, Lady Gaga, Avril Lavigne, Bruce Springsteen, and Pearl Jam, according to the site's backers.

The move comes three years after Google's YouTube began proving that the masses still love music videos. Professionally made music clips are by far the most popular fare on the Web's No. 1 video site, accounting for 14 of the 25 most viewed clips ever. The labels involved with Vevo boast a combined total of about 15 billion views on YouTube.

Much of the music industry, including a score of independent labels that have recently signed on to the project, think it's time for music videos to take the next step in their evolution. They want a standalone site packed with high-definition clips from marquee acts.

Don't look for any user-generated content on Vevo, according to Doug Morris, chairman and CEO of Universal Music Group, the man who came up with the idea for the service. He said he wants to offer music fans as well as advertisers a more polished digital stage. That's one of the main reasons the venture was built, to charge advertisers premium rates in exchange for premium content.

Another motivation for building the site was to give the music industry a greater say in what happened to its content.

In an interview with CNET last week, Morris made no bones about the fact that by launching Vevo, the music industry is serving notice: no longer will middlemen or third parties profit from the labels' video content without giving up a fair share.

"What we're really doing is taking back control of everything," said Morris, who operates the largest of the top four recording companies. "This is us taking control of our future...Vevo enables us to provide consumers with about 80 percent of all the music videos in the world. So, this is really like MTV on steroids. We're starting with that kind of audience. But now we're in control of it. We don't have to go through a middleman anymore."

The problem as defined by the music sector started with MTV and extends all the way to YouTube.

When MTV was created, everyone told the labels not to worry about getting paid because the cable channel helped promote artists. "It was good exposure," they were told. The experts said the same thing in 2006 when YouTube started to emerge as one of the Web's favorite music sources. For a long time, the record companies seemed happy to go along, even as MTV built a financial empire from the videos.

But this time around, the music industry can't afford not to be the one who cashes in. The rest of the business is in decline, as CD sales shrink and profit margins on downloads are sliver thin. Record execs have been criticized for not finding new revenue models, so that's what they are trying to do. They believe there's new money to be had from the videos, even as they readily acknowledge that getting to it hasn't always been easy.

Morris remembers seeing a video from a Universal artist posted to Yahoo a couple of years ago and asking one of his employees what the portal paid for it. The exec told Morris the video was considered promotional and Yahoo paid nothing.

Promoting what? The video was five years old and Yahoo was pocketing the ad money without sharing it with the creators, Morris recalled telling the employee.

"I then called up (former Yahoo CEO) Terry Semel," Morris said. "And I said, 'Terry, we want to be paid.' Semel replied 'Absolutely not.' Then, we took our videos down from Yahoo and AOL and their viewership declined, at which point they came back and they paid us. They paid us a percentage of a cent for each view."

Morris isn't implying that Vevo's music clips will no longer be used to promote music or that Vevo plans to charge to watch videos. No, they will still be offered to viewers free of charge.

What is changing is that music videos, which often cost tens of thousands of dollars to produce, won't be treated as loss leaders anymore--not in this economic environment.

Nonetheless, Vevo faces plenty of challenges.

Nobody has proven whether advertisers are willing to pay top dollar for online videos, even professionally made music videos. There's also the question about whether interest in the genre will wane just as did with previous generations of music fans. After all, MTV switched to reality shows for a reason, no?

Rio Caraeff, Vevo's CEO, says the music video is only one of the site's features. The obligatory playlists will be available but music lyrics will also be offered. Visitors will have more access to their favorite performers than ever and Vevo's video quality will be as much as three times as what is typically available online.

All these upgrades were absolutely necessary to draw the kind of top advertising dollar that label honchos seek, according to Caraeff. He said typical ad rates for Web video run somewhere between $3 and $8 for every thousand views. Vevo's mission is to attract rates of $25 to $40.

"Successful was how we felt about YouTube, in terms of the shear popularity of our programming," Caraeff said. "But what we felt was that there could be a better way to drive a business around it. Advertisers had some reticence and some reluctance to fully embrace music videos on YouTube. We felt that there was work to be done to restore the premium luster and really create a better experience for advertisers."

In the short run, look for Vevo to be an online music store where downloads are sold as well as the merchandise created by artists, such as clothes and perfumes. In the long run, a music-video subscription service could be rolled out, one that offers full-length concerts.

"I do believe we will have a subscription service where we will stream live concerts from all over the country to viewers for a monthly fee," Morris said. "This is futuristic. We have not built this yet, but we're working on it."

Executives of online music video service Vevo are close to finalizing an agreement that will bring content to the site from EMI, the smallest of the four top recording companies and the label of Coldplay, Katie Perry, and Norah Jones.

EMI's New York headquarters.

(Credit: Greg Sandoval/CNET)

The deal between Vevo and EMI could be announced at any time, sources familiar with talks told CNET.

"EMI is in discussions with Vevo," EMI spokeswoman Jeanne Meyer acknowledged, though she declined to disclose the current stage of the talks.

Scheduled to launch on Tuesday, Vevo will soon be able to offer music videos and other content from three of the four top labels: Universal Music Group, Sony Music Entertainment, and EMI.

The only major record company not partnering with the venture is Warner Music Group. Sources said talks between Warner and Vevo continue.

Universal Music founded the service earlier this year, aiming to cash in more on the popularity of music videos. At YouTube, which is powering back-end operations for Vevo, Universal's videos have accumulated the most views of any YouTube channel.

Universal has long wanted a standalone site to showcase video content, which includes traditional video but may also include other video content produced by artists.

Of YouTube's 25 all-time most watched videos, 14 are music videos. EMI recently signed a video-licensing deal with Hulu.

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.

Sony is planning a new online store a la Apple's iTunes, but with a few twists.

Announced at a strategy meeting in Tokyo on Thursday, the new service will hawk music, movies, books, and other downloadable content geared for its various electronics, including TVs, mobile phones, music players, and computers.

The service, which Sony aims to launch next year, will link the company's devices and digital content that it produces--setting it apart from other online stores.

"That's the kind of combination that I think is not seen anywhere else," Kazuo Hirai, Sony executive vice president for networked products and services, said in an interview with the Associated Press. "That I think is where our core competence lies, and that's a differentiator for Sony."

Hirai also spoke about the new service with BusinessWeek, saying that it won't just sell products but also tap into social networking by letting people upload their own photos or videos and connect with each other.

"It's not just access content, stream it, and enjoy," Hirai told BusinessWeek. "What are your friends watching right now? There's a screen that says all the programming that's available. It highlights all the things that your friends are watching, for example. It's a community experience."

Called the Sony Online Service for now, it will model itself after the company's successful PlayStation Network, a free service that has captured 33 million registered users who download movies, access social networks, and grab games for the PS3 and portable PSP console. Hirai said that gamers will be able to access the new online service directly through their PlayStation Network accounts.

Of course, Sony has been down this road before in 2005 with its late Sony Connect music service. The aborted iTunes clone was done in by internal politics and a failure to connect with consumers, forcing the company to shut it down in 2007.

But with a new, more cohesive management team put in place by CEO and president Howard Stringer, Sony is hoping to avoid the in-fighting that helped kill Connect.

Sony needs a shot in the arm at this point. Though the company pioneered the portable music concept 30 years ago with its Walkman, it has struggled to compete in the Digital Age. Continuing a string of quarterly losses, Sony took a $292 million net loss in its recent second quarter. Despite cost cuts and layoffs, the company is projecting a total loss of $1.3 billion for the full fiscal year.