CD-Swapping Site Promises to Pay Musicians Directly, Avoiding Record Companies

A new Web site that aims to transform music industry economics is set to go live on Thursday, giving musicians a major cut of the proceeds while largely freezing out record labels and other intermediaries., which allows fans to trade music discs for just $1, plus shipping, pledges to give a fifth of its sales to all the musicians, including lesser known session studio players, involved in the making of CDs exchanged on its site.

In a move that is certain to stoke controversy with music promoters, the founder of the Silicon Valley start-up said Lala will circumvent traditional copyright and royalty payment systems to compensate identifiable working musicians.

The site works something like an eBay auction exchange as it encourages consumers who sign up for the service to list all the CDs they may want to exchange as well as ones they would be interested in receiving.

Once an exchange is arranged, the recipient pays $1.49, of which 49 cents pays for shipping the disc, leaving $1 for the company for musicians, administrative costs and its own cut.

Lala said 20 cents of each $1 will go into a charitable fund for the musicians. It is looking to pay the musicians via a charitable organization it has set up called the Z Foundation. It plans on keeping 20-30 cents for itself, with the remainder going on administration.

"We all have this music that sits in our homes — wouldn't it be great if people can exchange those CDs," said founder Bill Nguyen, a serial Silicon Valley entrepreneur.

He's a veteran of start-up companies including Seven, a mobile e-mail rival to Blackberry maker Research in Motion (RIMM) and OneBox, which was sold to, which is now known as Openwave (OPWV).

Lala has been testing the service for several months with nearly 100,000 people and claims to already have another 200,000 people waiting to join the service when it goes live.

The service is bound to raise eyebrows at record companies which have stepped up their anti-piracy drives in the last few years to combat both CD and digital music piracy.

But a spokeswoman for the Recording Industry Association of America said that, "To date we have declined comment on — and will hold to that here as well."

Nguyen admits his company has had a mixed reaction from the record companies, with some viewing his plan as a threat along the lines of the pioneering peer-to-peer music file sharing service Napster (NAPS).

"One label thought it would help them to know their customers for the first time," Nguyen said. "But others' view of us is as the devil, more like peer-to-peer services."

Lala argues that it offering a vibrant new way for consumers to discover new music and that if successful, it will encourage robust sales of new music, unlike the culture of pirated CDs and downloading that followed in Napster's wake.

Nguyen claims that Lala's research shows that for every five CDs exchanged on the server a new CD was bought.

Though Lala is a for-profit business, Nguyen envisages a community of fans and musicians running many key elements of the site with a relatively skeletal paid staff that he plans to keep under 30 employees.

For instance, fans and artists will jointly decide whether a musician who applies for compensation will get paid under the system. Nguyen described the site as having a business model inspired by Wikipedia, the online encyclopedia built from editorial contributions by its users.

Lala has received up to $9 million in venture capital funding, Nguyen said.