The real reasons why Apple silenced Lala (and bought it, too)

As dorky character Ned Ryerson said in movie "Groundhog Day": "Am I right or am I right? Or am I right? Am I right?" Apple is shuttering the Lala service on May 31. While pundits galore said Apple was moving into the streaming music business, I asserted something else: That Apple bought Lala to improve music discovery and to combat Google music search.

Apple announced the Lala acquisition in December, when I blogged "Lala could make iTunes' Genius smarter." As I explained then, the acquisition is about "improving iTunes music discovery and competitively combating Google search." About two months before Apple bought Lala, Google improved its music search capabilities, which included free streams from various services, including Lala.

I sometimes complain about how bloated iTunes has become, but Apple can't be much faulted for music discovery. The iTunes player-store combination is simply one of the best mechanism's for new music discovery. However, Google music search put that discovery and underlying revenue stream at risk. Googling, say, Green Day or Ke$ha leads to free Lala streams of four songs. Lala charges for streams, too -- just 10 cents, which can be applied to purchase of the track.

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Or Lala did. The service has stopped taking new subscribers, according to a notice on the Website: "Lala is shutting down. The Lala service will be shut down on May 31st, 2010. Unfortunately, we are no longer accepting new users." By buying Lala, Apple set the stage to remove a cheaper streaming alternative, with option to buy, backed by the power of Google search.

But Apple also acquired technology it can use to improve music discovery. One option: Within iTunes, offer one full-length stream per track, instead of the 30-second sample. Streaming then wouldn't be a separate business but means of improving the music purchase experience and even generate more sales.

In the days and weeks that followed the Lala acquisition announcement, commentator after commentator pontificated about how Apple would move into the streaming music business, ala Lala. But that business makes no sense for Apple, which generates revenue from selling music -- not giving it away or streaming it on the cheap. More importantly, streaming offers limited benefits to iPhone OS devices. Apple already sells low-margin content to generate sales of high-margin devices. Streaming doesn't make sense, particularly when Apple has done so well with content people own -- or in the case of movies, sometimes rent.

However, a TV subscription service would make sense because of its potential to disrupt how people consume the content. Hulu shows there is demand. If Apple offered the long-rumored TV subscription service for the rumored 30 bucks a month -- heck, even $50 -- I'd cancel my AT&T U-verse account the same day. Cheap portable TV is the logical next stage beyond DVRs. Apple has the devices to do just that, whether the content is streamed, downloaded with DRM protection -- or both.

For Apple, a TV or other video subscription service is a more logical use of Lala technology and staff than music streaming. I would watch for TV subscriptions long before Apple would set up a music streaming service. So that makes a third major reason -- and one I didn't give in December -- for Apple acquiring Lala.

I think Apple Watchers don't seriously enough regard how big Apple's plans may be for Lala. In December, I explained:

There is something about this deal that reminds me of late 2000. That summer, Apple released new iMacs missing something: CD-RW drives. Windows PC manufacturers were going CD-RW, but not Apple, which stuck with DVD drives. In August 2000, I wrote for CNET News.com: Apple misses the tune on CD-RW drives." The Mac community flamed me. I got more than 200 e-mails (CNET didn't have comments back then), most of which essentially called me an idiot for not understanding that Apple was about movies not music.

Not long after my CNET News.com story posted, Apple bought SoundJam, which technology became the core of iTunes, which Apple announced in January 2001. The first iPod followed about 10 months later. My intuition is that Lala could be as big for Apple as SoundJam was -- and it's not for running a streaming music service but something much more.

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