Lala.com's Make-or-Break Move

The startup has a lot on the line with its plan to sell music for the iPod circumventing Apple's vaunted iTunes

by Peter Burrows

It doesn't take long to figure out what makes Bill Nguyen tick. The high-energy entrepreneur got rich creating a string of corporate software vendors, but he's only now following his real dream: running a music company.

His startup is called La La Media (don't call him CEO; nobody in the company has titles), and when he talks about it, he sprinkles the discussion with references to new bands only your kids have heard of, drops names of famous rockers he counts as friends, and reminisces about what music meant to him as a poor kid in Houston.

Limited Selection

Nguyen really gets going when he arrives at the health of the music business. "Too many people are really questioning whether they want to buy music anymore," he says. "But it's so much more fun to listen to music than to read about what Paris Hilton did in jail this week," says the boyish 36-year-old, sitting with one leg tucked beneath him on a chair in La La's study hall-like offices in Palo Alto, Calif.

Nguyen's company is going for broke on a bet it can recapture consumers' hearts. On June 4, La La turned on a new online service that lets people with an Internet connection listen to all the music on its Web site, Lala.com, and pay only if they want to download a given album to their iPod digital music player. It's an audacious wager that will require La La to shell out a whopping $140 million to buy the rights to songs from major record companies and hundreds of indie labels—an especially risky maneuver for a 23-person company that has $9 million in the bank. "We're betting the company on this," says Nguyen.

The company is close to lining up additional financing, Nguyen says. That's if La La stays in business long enough to need it. So far, Warner Music is the only major label that has agreed in principle to support the plan, so many visitors will find La La's selection lacking.

Against the Apple Tide

Still, Nguyen and his dream are gaining plenty of attention. "Right now, he's got the goodwill of at least one label—and the others have to think there's something there," says Gartner (IT) analyst Mike McGuire. "They're betting they can create an attractive online music service that will compel people to actually pay for music."

It's a radical notion indeed when scores of listeners still get music online for nothing by using peer-to-peer file-sharing services and CD sales are plummeting. Nguyen's business model contrasts starkly with those that rely on ad revenue or a monthly all-you-can-eat subscription, such as Real Networks' (RNWK) Rhapsody service. Nor is he following the path of Apple (AAPL), which sells songs as a means to sell more iPods.

La La aims to succeed the old-fashioned way—by selling lots of music. True, La La lets users listen for free from their PCs, as they can on scads of Internet radio sites. But they'll need to pay up if they want to own an album and move it onto an iPod (for now, La La doesn't sell individual songs or support other portable devices). Nguyen also wants to sell concert videos, and even music source code to help music fans create their own mash-ups. "Everything we do is about one thing: selling music," he says. "If we do all this and still can't get people to buy, this industry is dead."

Nguyen faces a second potential threat. He's monkeying with Apple's carefully constructed music empire. That's because La La's new offering is designed specifically to reach iPod owners—letting them grab music without using iTunes, the main method for purchasing songs online for the iPod. Instead, users can upload music they already have on CDs or as MP3 files (as long as they don't have embedded copying restrictions) to the La La site and then easily download it onto their iPods. Of more possible concern to Apple is that La La users can also buy music they don't already own. "We use the Web like a filling station for your iPod," says Nguyen.