Oct. 14 (Bloomberg) -- The founders of Kazaa, the digital file-sharing service that helped disrupt the music industry, are starting a subscription music-streaming service that will go live by early next year.

Rdio, based in San Francisco, is being developed by Janus Friis and Niklas Zennstrom and is backed by their venture- capital firm, Atomico Ventures, company executives said.

The service will let users archive and share music through a Web browser and stream it to certain mobile devices. A similar company in Sweden, Spotify Ltd., plans to enter the U.S. market by the end of the year and will be available on Apple Inc.’s iPhone. Music startups are trying to figure out the best business model. Apple’s iTunes store charges per song, while Pandora Media Inc. is supported primarily by ads.

“We have watched many ad-supported music businesses come and go,” Friis said yesterday in an e-mailed statement. “We felt the time was right to revisit this space, this time with a compelling offering and a sustainable subscription model.”

The service is still being tested and pricing hasn’t been determined yet, Chief Executive Officer Drew Larner said yesterday in an interview. The company plans to strike licensing deals with all four major music distributors, he said.

“The idea is to create a subscription streaming service that’s between desktop and mobile,” Larner said. “For someone who’s interested on a subscription basis, the notion of ownership becomes less important than the idea of streaming on- demand.”

Copyright Suits

Kazaa, which let people share music and video files, was targeted in lawsuits by major record companies that claimed the service violated their copyrights. They also blamed file sharing in part for their declining sales.

Sharman Networks Ltd., Kazaa’s parent company, reached a settlement with the music industry in 2006, and Kazaa now functions as a subscription service, with a separate version that’s ad-supported. It’s no longer controlled by the founders.

Friis and Zennstom also started Skype, the Internet- telephone service. EBay agreed to sell 65 percent of Skype last month for about $2 billion to a group of investors led by private-equity firm Silver Lake.

To contact the reporter on this story: Joseph Galante in San Francisco at jgalante3@bloomberg.net.

Last Updated: October 14, 2009 00:01 EDT