Last.fm's free, on-demand music could reshape all of radio

In what may later be recorded as a milestone development in the music industry, CBS-owned Last.fm has reached a deal with record labels enabling it to stream music of the listener's choice, from its entire library.

Last May, analysts were asking what CBS Corporation could possibly want with an online streaming media provider in the UK called Last.fm -- enough to have paid $280 million for it. Today, everyone got his answer.

In a radical change not only to this one outlet's business model but potentially to the music industry as a whole, CBS announced it has reached a deal with all four major record publishers and several smaller ones to enable Last.fm to play the listener's choice of music on-demand, for as many as three times per day per song, for no charge. Non-paying listeners will be subsidized through advertising, though as Last.fm continues to promise, not through nagware or spyware.

But the news does not stop there. The most intriguing aspect of this story to date comes in a little detail dropped by Last.fm co-founder Richard Jones on his personal blog this morning: Last.fm apparently made a private deal with royalties collections firms, for thus-far undisclosed rates, enabling the artists they represent to be compensated.

That bit of news came by way of explaining that artists not represented by a firm, including independent artists and even amateurs, will also be able to benefit from Last.fm by being compensated directly for each song played.

"We already have licenses with the various royalty collection societies," Jones wrote, "but now unsigned artists can put their music on Last.fm and be paid directly for every song played. This helps to level the playing-field -- now you can make music, upload it to Last.fm and earn money for each play...We're not printing money to pay for this, but the business model is simple enough: We are paying artists and labels a share of advertising revenue from the Web site."

Up to now, this has been the sticking point for Internet broadcasters hosting free music streams: If the listener got to choose precisely what she heard, the legal definition of the performance changes, and a new royalty tier would apply. This is why competing services like Pandora, which let listeners assemble "stations" that contain playlists featuring some songs they like and others they've never heard before but with similar characteristics, have been able to avoid paying an even higher royalty rate.

"If you're a 35-year-old who wants to sit down at your desk and tune into something to get music all day, this version of Last.fm is not going to do it for you," writes AccuRadio CEO Kurt Hanson in his RAIN industry newsletter today. "Where it does have value is in replacing your need to buy CDs (or, similarly, digital downloads). Why should you buy the new Amy Winehouse album when you can listen to any track you want, any time you want, at Last.fm?"

In a corporate statement this morning, Last.fm co-founder Felix Miller said, "We're building a platform to help redesign the music economy, enabling artists and labels to earn revenue according to how people listen, rather than how they buy."

Financial analysts today are praising the move as savvy and sophisticated, though at the same time something you might expect from the keen business skill of CBS CEO Les Moonves.

The Motley Fool's Rick Aristotle Munarriz wrote this morning, "It's funny to see terrestrial radio lobbying against the pairing of XM and Sirius as a threat to their livelihood, when this 'silent but deadly' killer is sneaking in through the Internet."

Future developments, Last.fm's Jones stated, will include the ability for desktop widgets to play tracks on-demand, and for paying subscribers to bypass both the ads and the three-repeat-per-day limit. The subscription fee for this extraordinarily promising service thus far is undisclosed.

The possibilities from there are incredible, especially when one considers the connectivity currently being embedded in mobile phones, and the power of brand bargaining that services like Rhapsody and Pandora have already discovered. A mobile music service subsidized through monthly fees paid to wireless carriers, enabling a co-branded Last.fm device to serve as a virtually infinite jukebox from anywhere in the nation, is no longer out of the question.

There are skeptics, however, including entertainment industry analysis firm Screen Digest. Having already evaluated the success of more limited on-demand music (ODM) services Napster and Rhapsody, the firm concluded today, "Screen Digest does not believe that the availability of free streaming proved to be a particularly effective way of converting users to paid services: Napster has removed the offer from its US Web site; and while Rhapsody has continued to grow in the troubled US music subscription market, it is far from clear that much of this growth can be attributed to the availability of free ODM in comparison to the quality of the company's core subscription offering and partnerships with Best Buy and hardware manufacturers like SanDisk, Sonos, and TiVo."

AccuRadio's Hanson also notes a possible key differentiator between the new Last.fm and both sites like Pandora and conventional radio: The latter group introduces listeners to new artists, whereas a completely on-demand service relies on its listeners' existing knowledge of, and preferences for, certain artists. "Somehow, somewhere else, the demand was created," Hanson wrote. "I either read a review or heard it on the radio or saw her on TV or had a friend recommend it."

Or perhaps he heard it first on Last.fm's pre-existing service, which included playlist suggestions not of the listener's making. In which case, the service's new business model may find itself having to incorporate elements of its old one, if it intends to make the level and amplitude of waves in the industry that Moonves and his colleagues are capable of making.