Giving away music to sell more CDS

(Business 2.0 Magazine) -- Even in the fast-shrinking music business, it would be hard to find a riskier bet than the one Bill Nguyen plans to make. The online service he launched in the summer of 2006, Lala.com, was built on a heretical notion: CDs are not dead, and music lovers still want to trade and buy them.

But Nguyen is going one heresy further: By giving his users access to free tunes, he thinks he can drive up his CD revenue even faster.

Lala already lets its 300,000 users list their CD collections and automates trades between them. When swaps are successfully arranged, the traders each pay $1.75 per CD to receive the discs they want in the mail, and Lala keeps 70 cents. (It will also sell a new disc for $10 if no one has the CD to trade.)

Now the company is attempting to license millions of songs from the big music labels -- a business model that could burn through Nguyen's $9 million in venture cash in four months. "We'll know pretty quickly if we're right or wrong," he says. If he can sell just one CD per user per month, analysts say, he'll be right.