Eight months after its acquisition by CBS, online radio service Last.fm announced a significant new feature: on-demand songs, free of charge. What's the catch? I'm still trying to figure that out.
Last.fm is paying royalties to the labels and independent artists whose tracks stream on the service. In the past, the royalty for on-demand tracks has been about a penny per play, which is significantly higher than webcasters pay. To cover those costs, Last.fm plans to sell advertisements. That's a business model that CBS, which paid $280 million for Last.fm, understands quite well. Not only is it a commercial TV network, but it's also one of the five largest commercial radio-station groups in the U.S. Not that Last.fm would want to port CBS' broadcast advertising model to its service -- its specialty is understanding each user's tastes based on what he or she chooses to play, so it's well positioned to target advertising to individual listeners. Such targeting commands a higher CPM, which means Last.fm wouldn't have to assault users with so many marketing messages.
When I played with Last.fm this morning, though, I didn't see anything other than Google-powered ads. No commercials in the audio stream, no display ads -- nothing that could cover the royalties I was incurring by playing track after track on demand. So it remains to be seen what Last.fm's strategy is. The free-music-on-demand field has been a tough one, with many announcements but few real entries (consider, for example, the often-delayed Qtrax and vaporous Mashboxx). With CBS' backing, Last.fm might be able to search longer for a workable formula than the typical start-up. But at some point, it has to find a way to pay the bills.
Update: I neglected to mention three advertiser-supported on-demand music services that have been on the market for a while: RealNetworks' Rhapsody 25, which offers 25 free plays per month; Napster's free.napster.com, which offers unlimited listening but restricts the number of times individual tracks can be played; and iMeem, which lets users play the songs posted by other users. IMeem is closest in approach to Last.fm, combining a social network with a media outlet.