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Summary:

Why did CBS decide to spend $280 million to buy Last.fm, a UK-based music community that faces many challengers, and other risks such as the rapidly transforming Internet streaming royalty structure? A vexing question, it has been on my mind ever since I read the news […]

Why did CBS decide to spend $280 million to buy Last.fm, a UK-based music community that faces many challengers, and other risks such as the rapidly transforming Internet streaming royalty structure? A vexing question, it has been on my mind ever since I read the news in the Los Angeles Times.

I have been in touch with some folks who know the media business quite well, and they believe that amongst other things Last.fm could be CBS’s hedge for its terrestrial radio operations. CBS, thanks to the Tiffany Network, is widely viewed as a television company. Many overlook the fact that it owns 144 radio stations in 50 markets, a business that brought in about $397 million in revenues in the first quarter of 2007, and an operating income of $156 million.

However, radio sales saw a decline of 9% (maybe because CBS sold off 39 radio stations) and operating income declined 4% when compared to the first quarter 2006. The terrestrial radio business has been feeling the heat, losing the attention battle to iPods and the Internet based music services.

The situation isn’t going to get any better, as music continues to be available everywhere. A whole generation is growing up and turning a deaf ear to the traditional radio. Last.fm, however, is moving in the opposite direction – growing, mostly because of its social features.

It is a community of like-minded (or same taste) music lovers that continues to grow. To distort a cliché, let a billion radio stations boom. CBS could start making money with the obvious business of selling music, but the real thrill would be if CBS takes this (to use another cliché) wisdom of crowds, and turned it into a tool for programming its on-the-air play lists. (Rags outlined this theme in his post, Can social tools save plain ole radio?) (Also, Internet is the Deejay.)

If people-curated news sites like Digg can find traction, why not a people-powered radio. A Last.fm Top 20? If Les Moonves and his able lieutenant Quincy Smith play their cards right, Last.fm could become the underpinning for CBS Radio sometime in the future.

Of course all that is in the future, once the glow of the deal has turned into a shade of reality. CBS will have to work hard to not disturb the core DNA of Last.fm. There are already some rumblings, and some Last.fm community members equate CBS’ presence to cat among pigeons.

Smith, who is leading CBS’ charge into interactive waters, told me that they have no plans to muck around with Last.fm or its community, emphasizing in his ever-so-colorful manner that CBS wants to do the reverse – take Last.fm’s DNA and graft it onto the big brother.

“If the ‘Man’ buys a social network, key is to keep our influence away from it.” As long as he and his bosses remember that, the hedge for CBS Radio could actually pay-off in the long run.

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  1. Great insight Om. You once again reveal the crucial angle that others have so far failed to uncover.

    It makes perfect sense and begins to sound like a shrewd piece of business rather than a desperate move.

  2. Peter Childs Friday, June 1, 2007

    The BBC has done experiments with user generated play lists with programs like the “The 10 Hour take-over”. They were successful because they not only aggregated song requests so that they played what the more people wanted – but that they recognized multiple users when the song played.

    Last.FM could do this for CBS on a massive scale.

    To have value to the individual stations the lists need to be tied to the individual stations – because it’s not just the play list that is important to but the on-air recognition of listeners that contribute. That’s what’s going to change the choice of where I listen – not the content.

    I also expect that there is a lot of interest in new distribution platforms. FaceBook allows developers to monetize their applications – and distributed widgets will show up all on other sites. Both offer a means to break the stranglehold of geography on terrestrial radio.

  3. That’s an interesting take, Om – essentially use a SocNet to find the Zeitgeist out there for the broadcast stations.

    One assumes that a fairly significant part of the “Buy Last.fm” business case would be the synergies that exist for editorial, content and programming, and that is a much less intrusive way to do it.

    However, I suspect at c $19/user paid, there will be some pressure to monetise it – I don’t know what Last.fm is making per user but I’ll bet its nowhere near that.

  4. Erik Schwartz Friday, June 1, 2007

    In addition to the radio hedge. Last gives them much better music research.

    I’m not sure what CBS spends. Clear Channel spends $70 million per year on music research.

    http://www.rollingstone.com/news/story/6432174/inside_clear_channel

    Last.fm revolutionizes that industry.

  5. Interesting POW, I’ve been wondering where the $ 280M could lie, and you bring worthwhile answers.

    I just hope that “grafting last.fm’s DNA” onto CBS will not suck out the former’s most precious resources: brilliant and passionate minds that built last.fm from scratch.

  6. As an active last.fm (around 50k tracks scrobbled), I don’t expect any major rumblings to come. Certainly no leaving movement like flickr hasa seen with the old-skool login.

    Last months last.fm has reshaped its structure quite some to still be considered a recommendation station and many features, such as combined tags radio stations have disappeared under pressure of the labels.
    Now with the name of CBS in the statutes, last.fm will be in another position when dealing with the labels (and also gets some major American legal backup/knowledge, yes lawyers). An already announced updated subscriber model is expected to bring all those missed features back. And then some.

    Actually IMHO the acquisition is the best thing that could happen. Not saying CBS, I don’t know what they plan, but a major media platform. The new video, hyped by many music fans such as me, who never have turned on radio anymore lately, or hardly watch TV, certainly not MTV, can majorly benefit from the acquisition. If CBS as a label uploads all their clips, it won’t take long before other labels follow and the step to a last.fm player with vids is not far away anymore. Based on the algo of course.

    I don’t see anything happen happen in radio in a near future, more in TV. TV somehow already is interactive (satellite and TiVo boxes can interact because often they are linked to a phone line).
    Now imagine that CBS takes its hole repertoire and tags it. Everything you watch, with a click you can love it, or skip/ban it. And soon you have a lsat.fm alike profile. And your TV, your CBS starts to play similar to what you have scrobbled.

    CBS ads at last.fm? CBS music pushed at last.fm? I don’t really bother as subscriber and my profile is not mainstream enough to hear CBS music. :D

  7. Interesting analysis. For me the only way to justify the purchase is to look at it as an acquisition of advertising inventory. CBS sells ad inventory and last.fm brings them new Internet inventory. Advertising will find its way to last.fm, just as it did to YouTube after Google got it. Check out the Ad-Supported Music Central blog at: http://ad-supported-music.blogspot.com/

  8. Apple and Jobs have rebuilt an empire around the premise that people DO want to own their music tracks, and that they are willing to pay $.99 for that pleasure. I have been using Pandora, and there are times that there is a long-tail artist that I would not have otherwise known about. If I had a credit card on file w/ Pandora or LastFM, I could take click and pay the $.99 toll for the ownership rights to that music file.

    I remember when Tower Records/Best Buy introduced listening stations in their stores. Why? Try before you buy works. Isn’t Internet radio the ideal vehicle for this try before you buy concept? Unlike terrestrial radio, you get more than the 80 songs in rotation.

    Also, you find a nugget of a song that you know that your buddy in New Jersey will dig, you could buy and email it to friend. As well, you could even choose to have the physical CD sent to your friend.

  9. Music is changing, certainly. Pretty soon every car will have I-Pod docks or MP3 players standard. I plan to write about it soon in my new entertainment/sports blog. Check it out:
    http://usss.wordpress.com
    Cheers.

  10. As an active indie label owner, I posted my catalog in last.fm’s library not only to expose my music to fans and encourage potential purchase, but to “give something” to a startup. I wanted to to do my part prove that social media works and is just as powerful as the major networks.

    Well, we’ve succeeded. However, now that Last.fm has indeed milked the corporate cow, I’m wondering if where we start to get paid royalties.

    Everyone can’t get paid besides the people who create the content.

  11. Paul Borgese, Associated Press Friday, June 1, 2007

    From what I have heard, CBS has already made a hedge with their investment in streaming audio marketplace TargetSpot.

  12. Joseph Price Friday, June 1, 2007

    Om, your analysis reminded me of XM’s relationship with Clear Channel. When XM was young, Clear Channel thought hedged its bet and invested in the upstart satellite radio company.

    It’s an interesting angle: funding an organization that may eventually displace you.

  13. PJ at Ferodynamics Friday, June 1, 2007

    “A Last.fm Top 20?”

    They already have a site-wide top list, but I doubt few care the Beatles and Red Hot Chili Whatevers are in the list.

    There are various ways to “use” the site. In theory you cultivate your stream carefully, by banning as many songs as you can, trimming down the dead stuff, until eventually you find yourself matched up with a few people that listen to music you might like, some of the time, and theoretically they help you to trim the vine, the stream of newness that brings new creative life into your world, but you’re always, always banning songs–it’s actually work, and the idea is that you become your own portal in a sense, eventually, your own stream. I imagine the more active listener-neighbors around me have direct contacts with artists, feeding new songs to the machine, shortening that delay to ecstasy. But my neighbors also annoy me with bad songs, and I never find the need to talk to them, they’re all guys about my age. For some reason there’s no hot women in my music neighborhood! Maybe CBS can solve that! LOL

  14. I’m convinced that the majority of last.fm users don’t actually know about the personalised radio station – and use it for profiling and social networking. This is a worry because they’ve started to get feature creep a bit – and potential new users look like they get scared off a bit, choosing to use iLike which they instantly understand.

    As for me, I use Last.fm to profile my music, but use The Filter ( http://www.thefilter.com ) to build my radio stations from my own music collection.

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