NEW YORK (FORTUNE Small Business Magazine) - So you are relaxing at a crowded bar when suddenly a catchy new song starts playing on the radio.

"What's that called?" you ask.

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"'Soul Meets Body,' by Death Cab for Cutie," says the bartender.

You could try to commit that to memory. Maybe scrawl it on a napkin. But what if you could simply buy the song instantly? MusicGremlin, based in New York City, is about to introduce a Wi-Fi MP3 player that connects to the Internet. "This untethers you from the PC, allowing you to download music directly to the device," says founder Jonathan Axelrod, 30.

Axelrod and co-founder Robert Khedouri, 36, are ex-McKinsey consultants and amateur musicians. Frustrated by the shortcomings they saw in existing MP3 players, they teamed up in 2003 to start MusicGremlin. They have raised more than $5 million so far from angel investors and venture capitalists.

That funding has gone toward developing the wireless MP3 player, a daunting technical challenge. To offer any kind of music selection, the pair had to convince major record labels that the product worked. They have successfully secured the digital download rights for two million songs featuring artists from Miles Davis to Madonna. Songs will be available for 99 cents apiece or through a subscription service for a monthly fee.

A web-ready MP3 player faces an obvious challenge: Users need to be in a wireless Internet hot spot to download a song (see "Where Music Fills the Air"). But such a device also makes some truly outre new functions possible. For example, MusicGremlins can, in most situations, communicate with other MusicGremlins, even without Wi-Fi. This feature market-tested particularly well with teens, according to Axelrod.

Picture two high school sophomores sitting in the back of a classroom, earbuds barely visible. MusicGremlin's community feature allows each to view the song the other is playing. They can also beam song titles to each other, accompanied by canned pop-up messages such as "Don't you love this tune!" If the friend agrees, she can purchase the song right away.

Even if the classroom isn't a hot spot (most aren't), one student can download the song from the other's MusicGremlin. Mercifully, you can disable MusicGremlin's community function. That way fellow travelers can't push annoying song suggestions your way. Nor can anyone see that you're grooving on Hall & Oates.

MusicGremlin will retail for less than $400. It will be available online this spring and eventually, the firm hopes, at specialty retailers. Axelrod expects his product to remain a fringe player in the hypercompetitive market for MP3 devices. Realistically, he knows he can't take on an icon like the iPod. MusicGremlin's owners hope to license their software to a biggie such as Apple, Dell, or Philips. Axelrod claims that several major companies are testing it out.

"That's probably the right way to go," says Shiv Bakhshi, an analyst with IDC in Framingham, Mass. "For an established company, it makes more sense to buy MusicGremlin's solution than to try to build one itself from scratch."

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