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Turntable.fm Has Lots Of Buzz, But Will The Labels Crush It?

As a standalone service, Turntable.fm launched less than a year ago, and it has already gained considerable buzz among the tech and music elite in addition to over $7 million in funding from undisclosed investors. Buzz is great, but will Turntable turn into an actual business? It will be a big win for music fans and music entrepreneurs if it can acquire the right label licenses. Unfortunately that’s a big if.

Turntable.fm was founded by entrepreneurs Seth Goldstein and Billy Chasen. The site creates DJ rooms where between one and four people can stream for anyone who wants to enter the room and listen. DJs can choose songs from a library provided to them or upload their own MP3s to play. Currently users can only log in if they are invited by a friend over Facebook.

We did some digging around and believe the most popular DJ on the site is someone named Woooooo, with about 1,000 fans. Recently Diplo premiered three tracks from Major Lazer on the site in a special VIP room. You can see where the service is headed.

Currently we don’t think Turntable makes any money, but we see multiple revenue streams for the service, including:

–Advertising: Any service where lots of music fans spend a significant amount of time in one place is a great one to market to. Music fans tend to be young, hip tastemakers that advertisers will seriously pay up for. If you add “discovering music” to this marketing pitch you get some really valuable ad inventory, two to three times more expensive than less targeted online ad inventory.

–Virtual Goods: Virtual goods sales have grown exponentially over the past few years and are expected to nearly double again in 2011. Turntable can sell a large number of virtual goods to its users, including better turntables, VIP badges, clothes, drinks, basically anything they can dream up that someone would want to buy in a club. And if you think people won’t buy these things just ask Zynga, which made $600 million in 2010 selling virtual goods like tractors and virtual land.

–Commerce Affiliate Fees: If enough people start entering DJ rooms and spend enough time on Turntable, the company should be able to make some revenue by referring users to music sites like iTunes or Amazon (NSDQ: AMZN), taking a cut of the sale.

–Data: With so many people listening to new music curated by people they respect and trust, there is a real opportunity to sell data to record labels. With music listening moving increasingly online, record labels are hungry for the accompanying data, which helps them make decisions about which artists/albums to promote and where. Turntable can sell this data to them. Of course, the labels are seriously hurting these days so selling anything to them could amount to squeezing blood out of a turnip.

This story usually ends the same way. Promising startup launches new service that is great for listeners and consumers, but doesn’t properly license the music it makes money off. Record labels slap startup with enormous lawsuit and either get the service shut down or force unprofitable terms on the company that eventually drives it into bankruptcy.

We hope not, but this story is likely to end the same way. Turntable has not secured licenses and currently claims its service falls under the Digital Millennium Copyright Act (DMCA) safe harbor. DMCA safe harbor protects certain services from copyright infringement suits as long as they immediately block access or take down infringing material.

Many startups have claimed the same exception but have either been forced to enter into unprofitable deals with the labels through legal action or were shut down after they could not fight the labels and their cash. Remember Imeem or Muxtape? How about Veoh? Those are just a few of the casualties.

It appears Turntable has secured broadcast licenses associated with most online radio services (except in Europe, where royalties are unusually high that the company pulled its overseas service), but we expect the labels to go after the service for download licenses since it enables users to upload MP3s to the service where others can listen for free, essentially on demand.

We’ve reached out to several label executives, and it doesn’t appear that talks are occurring, and no legal claims have been filed, though most agree one of the two will happen soon.

This article originally appeared in metronomereview.com.