Skype Founders Zennstrom, Friis Begin Streaming-Music Service

Skype Technologies founders Niklas Zennstrom and Janus Friis opened an online service that sells monthly music subscriptions, taking a second stab at the broadening market for digital songs.

Rdio, based in San Francisco, on June 3 started selling subscriptions that give access to more than 5 million songs for $4.99 to $9.99 a month, depending on the type of device used, the company said in a statement. Rdio will also provide applications that make the service available on Apple's (AAPL) iPhone and Research In Motion's (RIMM) BlackBerry, says Rdio Chief Executive Officer Drew Larner.

Zennstrom and Friis are betting that consumers will opt for collections of songs that reside on remote servers, rather than on a user's computer or other device. "The whole download model is going away," says Friis in an interview. Rdio will seek distribution through network service providers and other Web sites, possibly including Skype, he adds.

Standing Out Is Crucial

The challenge is standing out in a field, now crowded with services such as Rhapsody International and Spotify, that may soon include Apple and Google, says Michael McGuire, an analyst at Gartner (IT).

Rdio (pronounced "AR-dee-oh"), a play on the words "radio" and "audio," is funded by Atomico Investment Holdings, the venture capital firm founded by Zennstrom and Friis. The music service will include social features that let users read each other's reviews, browse other people's music collections, and follow information about their favorite bands and friends' listening habits. "What's going to differentiate them is how they create their unique experience, and how they do in terms of marketing and promotion," says Gartner's McGuire.

Google (GOOG) said on May 20 that it plans to start selling digital music tracks for smartphones based on its Android software. The company has acquired technology that would let it stream music from PCs to mobile devices.

Analysts have speculated that Apple will begin a music subscription service that complements its iTunes download site. Last December, Apple bought Lala, which lets users stream songs, buy downloads, and communicate with other users. Lala was shut down on May 31, leading analysts to predict that a streaming version of iTunes may be in the works. Apple spokesman Jason Roth declined to comment.

The digital music market generated $1.87 billion in U.S. sales last year, according to Forrester Research (FORR). Subscription music services accounted for $209 million of the total and may rise to $242 million this year, Forrester said.

Founders First Created Kazaa

Rdio is the second attempt by the European entrepreneurs to tackle the digital music market. Zennstrom, who is Swedish, and Friis, from Denmark, also founded music-sharing Web site Kazaa, which settled litigation with the music industry in 2006.

The two are best-known for Skype, which they launched in 2003 and sold to eBay (EBAY) two years later for an eventual $3.1 billion. In 2009, eBay sold a 65 percent stake in Skype to a group of investors including Silver Lake Partners, Andreessen Horowitz, and the founders for about $2 billion.

The proliferation of smartphones capable of streaming music is giving technology companies and record labels new ways to reach listeners, Friis says. "At first, we were just joking around that online music could be big again," he said. "The labels would like to enable a new generation of music services."

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