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Last.fm says streaming leads to bigger music sales.

(Credit: Lastfm.com )

Free streaming music turns people on to new music and encourages them to buy, says social-networking site Last.fm. In the music industry, this will not come as a huge revelation.

Last.fm, acquired by CBS last May, announced Wednesday that since the company launched its on-demand streaming service two months ago, CD and download sales through its partnership with Amazon.com have more than doubled.

So what does that mean?

Music discovery continues to be one of digital music's greatest vulnerabilities. Nobody has come up with a sure or simple way to help people wade through the millions of tracks available on the Web. Last.fm's numbers seem to confirm long-held beliefs of many that enabling people to sample full-length tracks is one way to spur demand.

So Last.fm can take pride in knowing it was early to an offering that some music fans might find useful--albeit one that isn't exclusive to Last.fm.

Indeed, when it comes to allowing users to test drive music before they buy, Last.fm is definitely in the back seat. Imeem offers unlimited plays while London-based Last.fm only allows a user to listen to an individual song three times.

In addition, MySpace.com is preparing to launch its own streaming service that will offer unlimited plays.

Christian Ward, a Last.fm spokesman, said the company is talking to the labels about rolling back some of the restrictions, presumably the three-play rule.

"We wanted to see how this service works first," Ward said. "(The spike in sales) will encourage more discussion about pushing those limits back."

Ward added that his company isn't worried much about competitors. He said what separates Last.fm from the others is its music-discovery engine that can suggest songs based on what a user has listened to in the past.

"Offering free access to music is one thing but finding your way through all that is another," Ward said. "Music discovery is a lot easier on Last.fm."

SpiralFrog continues to dodge bullets.

The troubled ad-supported music service that has needed loans to keep operating was supposed to pay creditors $7 million by April 19. At least from the outside the situation looked bad because it was only three months ago that SpiralFrog needed a $2 million loan. Where would a start-up that's only been in business for six months get that kind of money?

Turns out, SpiralFrog's managers renegotiated the loan terms and the company now has a year to repay, according to a company spokeswoman.

So SpiralFrog keeps hopping, but for how much longer?

At the end of the month, privately held SpiralFrog is due to report year-end earnings for 2007 (the company reports like a public company as part of an agreement with investors). That report could hold important clues about the company's prospects.

Early indications are that SpiralFrog, which attracted lots of media attention two years ago when it announced plans to offer free legal music, has met with mixed results.

The good news is the New York-based company topped 1 million unique visitors in January and music-industry sources say it has made several hires in recent weeks.

But the service still wrestles with the same problem it has tried to remedy for two years: a highly limited song selection.

Once trumpeted as a potential iTunes killer, SpiralFrog's music library is dwarfed by iTunes. After two years of trying to sell the four largest music companies on its business model, SpiralFrog executives have managed to sign one: Universal Music Group. It's extremely hard for a music service to compete against Apple's music store, but it's nearly inconceivable to do it without songs from all top four labels.

Meanwhile, social networks, such as Imeem and Last.fm, which stream music to users' PCs, can boast licensing deals with the majors. And MySpace and Facebook are also in talks with the labels about offering music.

Numerous sources close the record labels said SpiralFrog's problem mostly comes down to its business model. Sony BMG Music Entertainment and Warner Music Group don't have much faith, the sources said. EMI Music Group's publishing unit already has an agreement with the service and the label could eventually sign, according to one source.

Another deal breaker for the labels has been the turmoil at the company. An executive shuffle in Dec. 2006 and SpiralFrog's money troubles has given the big music firms pause, said the sources.

Those financial worries may continue to undermine the company.

SpiralFrog needed to pay Universal Music $3.3 million before it ever sold a single song. Even if managers convince another major to sign on, where are they going to get the money to pay the fees?

In the third quarter, SpiralFrog burned through $3.4 million while reporting revenue of $20,400. But the free-music service, which launched in September, had only been open for a three weeks during that period. Starting with the fourth-quarter report, we're going to start seeing how scrappy SpiralFrog really is.

MySpace Music is the name News Corp. executives are tentatively using for a proposed music service that they are pitching to record executives, two sources told CNET News.com.

The news that News Corp., MySpace's parent company, has approached the four top music labels was first reported over the weekend by the blog PaidContent. Here are a few new details on what News Corp. is running past the music companies.

News Corp. has tested the record industry's interest in a site that would offer music in several different ways, including ad-supported downloads and streaming to PCs, according to a source with knowledge of the talks. This may be why PaidContent reported that News Corp. was proposing an ad-supported download service while the blog Silicon Alley Insider said the company was backing a streaming service.

News Corp. has also broached the idea of a streaming service that featured a prominent "Buy Now" button that allowed users to purchase songs off the site, another source said.

It's important to note that these are only talks. News Corp. appears, at this point, only to be taking the record industry's temperature, the sources said. Representatives from the labels declined to comment. A MySpace spokeswoman was unavailable for comment.

One of the hurdles that News Corp. must overcome before striking a deal that includes all of the big record companies is to make peace with Universal Music Group, which filed copyright infringement suit against MySpace in November 2006.

Sources confirmed PaidContent's report that News Corp. has offered an equity stake in the new company to all the labels. But what's unclear at this point, according to the sources, is whether News Corp. is going to fully fund the new venture itself.

One source said News Corp. told music executives that the goal for the start-up would be to eventually go public.

Clearly, this is a move by News Corp. Chairman Rupert Murdoch to outflank Facebook in entertainment. The question now is what Facebook will do to counter this?

The labels already have streaming deals with social networks, Imeem and Last.fm. At this point, it doesn't look like anything could prevent Facebook from cutting a similar agreement with the labels.

Beware, SpiralFrog and Imeem. A powerful new player is eyeing your ad-supported music turf.

MySpace.com is in talks with the four major record labels about starting a free-to-consumer music service, a source with knowledge of the talks told CNET News.com on Monday night. So far MySpace and the labels are just talking, the source said, but PaidContent, the blog that broke the news, reported that the music companies are being offered an equity stake in the News Corp.-backed start-up.

A MySpace spokeswoman declined to comment Monday evening.

There are conflicting reports about whether the new music service would offer downloads or stream music to PCs. PaidContent reported that it's downloads, but Silicon Alley Insider reported that its sources said the site would stream songs.

My source couldn't confirm either way, but I have a hunch that it's streams. Here's why:

The labels have shown almost no interest in giving away downloads via an ad-supported site. SpiralFrog has struck a partnership with only one top record company (Universal Music Group) in two years of trying. Qtrax, another ad-support download service, can't boast a single major label yet, but the start-up is still negotiating.

Ruckus is an ad-supported download service that has partnered with all the big labels but caters only to college students.

Meanwhile, social networks Imeem and Last.fm stream music to users' PCs and each has signed deals with all four majors.

The labels like streaming because it locks up their music on PCs and protects it from piracy. Streaming also encourages sales, or so the music companies hope. The thinking is that Imeem and Last.fm users will eventually purchase music they discover on the social-networking sites.

What could sink my theory is if MySpace is willing to pay so much for downloads that the labels have to say yes. With Facebook breathing down its neck, MySpace could bet that offering free music to users--in exchange for looking at some ads--would be a whopping advantage over competitors.

News Corp. has the kind of deep pockets that it could afford to keep a loss leader like this going for a couple of years.

Regardless, the big winners in either scenario are consumers. Free and legal music is getting easier to find all the time.