Last.fm launches free music service

by Matthew Rock & Real Deals - Wednesday, 23rd January 2008 -

Last.fm, the pioneering online music business, takes a huge step in revolutionising the music industry.

To those who say Britain can't hack it in the global technology-led knowledge economy, we say... pah!

The news today that Last.fm, "the social music revolution", is changing the rules in the music business by offering "free" music through its site and paying aspiring musicians a royalty every time users download one of their songs, is proof that the UK is right at the cutting edge.

Guy Hands, owner of private equity firm Terra Firma, will also be interested to see such innovation in the music industry - £3.2bn for EMI may not seem so generous if similar new revenue models can be applied across the EMI catalogue.

We first spotted Last.fm a few months ago when the business was being courted by CBS for the UK's biggest ever Web 2.0 deal - a reported $280m. Now it looks as if it's becoming an iconic British entrepreneurial success story (albeit one that's now owned by the Americans!).

Last.fm builds a profile of its users’ musical taste based on the songs they listen to, provides recommendations and radio streams, and connects them to users with similar tastes. Launched in 2002, it has more than 15 million users, with a concentration of members in the US, the UK, Germany, Poland, Brazil and Japan.

Users install Audioscrobbler – a plug-in invented by co-founder Richard Jones, which sends the name of every song they play on their computer or iPod to Last.fm, where it is added to their music profile. Collecting this data helps Last.fm to recommend music and create personalised radio profiles. The site also has partnership agreements with major music labels, and publishes information on music releases, festivals and other events.

The company was founded by Felix Miller, Martin Stiksel and Richard Jones in 2000. Stiksel, an Austrian music journalist, and German music fan Miller previously co-founded Insine.net, a record label for unsigned electronic artists. They later joined forces with Jones, who developed Audioscrobbler while a computer science student at Southampton University.

The founders initially struggled to find funding – launching soon after online music-sharing site Napster had been crippled by a wave of lawsuits – raising cash from family and friends. Unable to pay rent, they camped on the roof of their office in east London. Later, they received investments from internet entrepreneurs including Joi Ito, the founder of PSINet Japan, Digital Garage and Infoseek Japan; Reid Hoffman, the chief executive and founder of online networking service LinkedIn; and Stefan Glänzer, the co-founder of the 20six weblog services.

However, when Index Ventures approached the Last.fm team, investing an undisclosed amount in May 2006, according to Index’s Neil Rimer, “they were still a pretty early-stage company – a small team who were sleeping under their desks”.

“Last.fm was a team of very talented, prototypical entrepreneurs who got together over a shared passion for music,” said Rimer.

“With relatively little money they managed to do something interesting. They didn’t come to us; we had to convince them to take our money. They had the choice of carrying on alone or selling some of their equity to someone who could help them to expand.”

Index’s investment was spent mainly on building the team. “On the web, you don’t need to raise a lot of money to get something up. Very little money and a small team is required to convince yourself if you have a real opportunity,” said Rimer.

Returns on the CBS deal, which came just a year after Index’s investment, were not disclosed. However, according to press reports, each of the founders received £10m (14m) from the sale, while Index received around £28m. The firm is believed to have made an original investment of under $5m.

While the exit price was smaller than the $580m News Corporation paid for MySpace, or the $1.65bn Google paid for YouTube, it was still a very substantial exit for a European web 2.0 venture, and indicated the appetite of old media empires for the new wave of internet companies.

According to Rimer, Index “felt that Last.fm was a compelling business that could stand alone”, and had not been seeking an exit when it was approached by CBS. “A lot of media companies have content they have been building for the past hundred years and are looking for access to new audiences,” he said.

Messrs Stiksel, Jones and Miller are pretty low-profile but, if truth be known, they've got plenty to shout about. We'll keep you informed of developments in this inspirational story.

Related story: The trouble with EMI