HIGH FIDELITY

Updated 6:10, 7/13: Turntable does actually limit the # of songs from a particular artist within a given timeframe, rule 2 below. I am guessing they have no solution for #4 though.

The latest online music sensation, Turntable.fm, has reportedly raised a $7 million round of financing at a $37 million valuation.

No doubt this is the most interesting online music service to come around in a couple years; it is hugely engaging and highly addictive. I am a big fan of the service myself and use it nearly every day. But still — $38 million seems a bit rich for a company with 300k users, no clear business model, and likely legal challenges. No doubt the company will grow its audience, and figure out some kind of revenue model, but the resolution of that last issue — the legal challenges — could make or break the company.

Turntable.fm operates as a statutory licensee of SoundExchange, just like Pandora, Slacker and other online radio services, all of which operate under the legal umbrella of the DMCA and pay royalty rates set by the Copyright Royalty Board (as well as fees to ASCAP, BMI, and SESAC). Although the DMCA is a notoriously imperfect document, it does spell out some clear rules for Webcasters, particularly around what they cannot do. Failure to comply with these rules usually means you’re in the “interactive” (on-demand) bucket, where individual label deals are required and the fees are much higher. You don’t want to be in that bucket unless you have no choice.

Some of the Webcasting rules include: 1) defining a radio “station” as at least three hours of music, 2) during which the same artist cannot be played more than three times; 3) not allowing users to play songs of their choosing on demand; and 4) and not publishing to users the order in which songs will be played in the station, or even the randomized list of all songs in the station.

Although Turntable.fm does have some safeguards in place, it is easy to “break” many of the rules above, often by making use of the site’s social features. For example, I could create a room called the Billboard Hot 100, invite four of my friends to it, and we could all agree to play the songs of the current Hot 100, in order, and nothing but the Hot 100. This would break rules 3 and 4 above, since we’d be colluding to play a specific playlist of songs of our choosing. Or I could start a Madonna room, in which people play nothing but songs by Madonna, breaking rule 2 above. It’s easy to think of other examples.

The likely outcome of this is that Turntable.fm will be forced to either a) follow the rules of the DMCA strictly, disallowing the above examples; or b) do deals with the labels, at rates higher than those of SoundExhange.

Both scenarios will cost them users. Scenario A will have a negative effect on the user experience, making the service less exciting and addictive. This is a fundamental law of online music services — user experience usually suffers around the time rights holders get involved (partly this is the fault of the user who expects digital content to always be free and unrestricted).

Scenario B will force Turntable to become a subscription service, since the revenue from advertising is never ever enough to cover the costs of on-demand licenses — a second fundamental law of online music services. This will make the service available only to those willing to pay, which we know from experience is not a large number in the US, somewhere around 1 – 2 million.

Personally, I would pay something to use Turntable.fm, but will the masses?

There’s a new post in TechCrunch today talking about Pandora’s redesign.

This redesign is long overdue — since 2006, the company has made almost zero improvements to the design or behavior of its basic Web product. Instead, they’ve focused on a) improving their song matching intelligence (an investment in technology IP) and b) building and launching their mobile app, which has driven massive user growth. They didn’t invest in improving their user experience because they didn’t have to — they were gaining users anyway.

Now, with a bunch of things happening at once in this space — the incompatibility of Flash with many Apple devices (and its decline as a technology), the rise of compelling social music services like Mog & Rdio, the launch of Spotify in the US, the threat of iheartradio, more VC funding for digital music startups, their IPO — Pandora realizes it’s no longer the upstart but the incumbent.

Interesting how the new design looks like the offspring of Spotify, iTunes and Rhapsody Beta.