Lala was originally a way to swap used music CDs, similar to an eBay meets NetFlix, similar to PeerFlix. They have been gradually moving in a digital fashion, and last week they launched a fairly aggressive move in the digital space, with the initial support of Warner Music and of some indie labels.
The basis of the service is a free, unlimited streaming service which encourages users to share playlists and then purchase the digital albums, which can be loaded directly to your iPod without using iTunes. In addition, the program scans your hard drive and uploads the music it finds to the service so you can access it online.
I could further discuss the feature set and pricing model, but it's really not worth even spending the digital ink on it. There is literally no logical business basis for this service, and we will look back at this as one of the signs of Bubble #2, just like College Club, Free ISP services, and other similar gambits were a hallmark of the last Bubble.
The reasons are clear:
- There is a very limited set of content for the service, with no reason to believe they will have a full set of content any time soon.
- iTunes/Apple has a history of blocking 3rd party systems which access their iPods - it doesn't stop the usurpers forever, but it makes for a difficult user experience, having lived through it at RealNetworks when we went through that process
- The prices for digital albums don't seem to be cheaper than on iTunes - in fact, a spot check of albums appeared to show that LaLa was actually more expensive than iTunes.
- The 3MB LaLa browser plug-in doesn't truly communicate to you what's going to happen - then it starts scanning your hard drive and uploading the information to LaLa, without making it clear what's going on. Is happening as I write this note and is very irritating since it reminds me of the old P2P services.
- There doesn't appear to be any huge technology barriers to entry to their offering, which means that if the service actually became successful, the numerous other larger players would duplicate the model.
- Oh yeah - and the business model makes no sense. Unless the labels are giving LaLa a break on royalty costs (which is presumably not happening), then the ongoing costs are $6-8 a month per registered user, or some similar type of usage based royalty. Given that the digital commerce model offers providers like LaLa a 20% profit margin (including Apple at $1B in sales a year), the customer acquisition costs are going to be much higher than what the gross margin will be, even if we assume that users can be trained to purchase solely from LaLa given that it doesn't have a lot of content and appears to be more expensive than iTunes.
The running thesis is that LaLa has other ways to monetize the service, through advertising or other TBD sources, and that this is a way to ramp up interest (try LaLa.com in Quantcast to see how low the traffic appears to be) in the midst of a very competitive and low margin marketplace. We haven't seen those initiatives yet, but given the smart investors and management team, I assume there is actually a better plan coming - however, in the current vein of the movement to keep the TV show Jericho or as used in the classic WWII Battle of Bastogne, the answer is NUTS.