In case you haven’t heard, Lala bought defunct WOXY.com, the online radio station. WOXY went silent September 15th. For me, the main motivation behind the acquisition seems to be an attempt to draw more eyeballs (a quick look at the member list shows 7800 registered users in the forum) to the site in hopes of ramping up membership. Seems like WOXY’s in for another rebirth and death if they don’t come up with a sensible revenue model. WOXY’s own press covereage highlights the IP difficulties of webradio:
Royalties paid by Webcasters to SoundExchange range from 10 percent of their first $250,000 in revenue - and 12 percent above $250,000 - to a rate based on an aggregate tuning hour, which is $.0117 per listener per hour; that is, the number of listeners per hour times that rate.
Webcasting royalties for 2003 were $7.5 million, Simson said.
It seems like a tough slug ahead for Lala, but I have of late been intrigued by the economic model behind the service. They have created an online secondary marketplace for CDs, where they get a dollar for each transaction. Like any market, it can be broken down into supply and demand. At a $1 per CD it’s a great deal for buyers (and a lot healthier than what McDonald’s offers for the same price). I’m trying out the service right now. However, my overall feeling is that Lala’s biggest challenge will be keeping up a supply of CDs for sale in the marketplace due to the following problems:
- CDs are taken off the market after purchase as people listen to them
- The best CDs are the least likely to be traded (this can lead to mediocre inventory)
- Uncertainty in what CDs you will eventually get from the market
Note: Rampant piracy solves all of these problems.
The shrinking of people’s personal CD libraries is the most daunting issue. When people first receive a CD people will not want to turn around and ship it off again(unless they burn a copy of course, think snail-mail Napster). So, if people continually legitimately use the service, and collect the CDs they love, the number they will send out shrinks.
The degree to which the other problems are mitigated depends on how cleverly their karma algorithm is constructed. Leeching is the easiest to solve. Leechers may be given one free pass with the purchase of their first CD, but can quickly have their future transactions put on hold. The other two issues are caused by the riskiness of selling a CD on the market. If I buy a CD and it never comes, I lose a $1.75, but if I send a CD and can’t seem to get another one I’m interested in, I’m out my original CD. Reducing this exchange risk is key getting people to send out more CDs and increase the percieved value they receive when sending out a CD (I’m more likely to send CDs out when I know that I have good ones coming in).