What does CBS want with Last.fm?

Media giant pays $280 million for social network devoted to music, but industry watchers wonder if CBS wants the community, the tech or both.

CBS has purchased Last.fm, a social-networking site devoted to music. What it plans to do with the site, however, isn't clear yet.

With the $280 million deal, announced Wednesday, CBS has acquired a popular social-media technology: the music "scrobbling" engine developed by Last.fm that analyzes what its members listen to. Based on scrobbling results, Last.fm offers recommendations for members' playlists, creates personalized radio stations, and connects members with people who share similar tastes.

The deal continues the seemingly never-ending streak of tech acquisitions that traditional media companies have been pursuing as a way to boost their digital offerings. For example, News Corp., which purchased MySpace.com in 2005, said Wednesday that its Fox Interactive Media division has agreed to acquire image-sharing site Photobucket and slide show creator Flektor.

"It's an aggressive move. Last.fm is a really good service," Jupiter Research analyst David Card said of the CBS purchase. "Everybody has a slightly different experience, but they do a great job of integrating community with music discovery."

According to a statement from CBS--which also recently acquired Web video series Wallstrip and has signed multiple video syndication deals--Last.fm's founders, Felix Miller, Martin Stiksel and Richard Jones, will continue to run the site independently.

"CBS is paying a premium for something more than just the rapidly growing audience.
--James McQuivey, analyst,
Forrester Research

But industry watchers were divided over what CBS has in mind for London-based Last.fm. The service, which was founded in 2002, is popular, with more than 15 million active users worldwide. The acquisition gives CBS access to a young, tech- and music-savvy demographic, which is certainly a valuable asset. But according to Forrester Research analyst James McQuivey, the hefty price tag suggests that CBS may be after the scrobbling technology too.

"The price paid for Last.fm is about what MySpace paid for Photobucket, which boasts more than twice as many members," noted McQuivey. "CBS is paying a premium for something more than just the rapidly growing audience. To my mind, this means CBS thinks it is acquiring a useful technology which can be applied to multiple Web sites."

CBS' official statement hinted at this too, stating that Last.fm's founders and management team will "work with all relevant CBS divisions to apply their community-building and technology expertise to extend CBS businesses online and within the mobile space."

Card, however, stuck by his assertion that CBS was more interested in acquiring Last.fm for its already-strong community, not the software behind it.

"I doubt this is a tech play," he said. "I think they like that Last.fm has a community already, has a lot of people using it, and delivers a good experience."

Card pointed out that Last.fm's technology relies heavily on its existing user base and that it would be very difficult for a company to use the technology in other products without the community factor.

"Collaborative filtering is not that hard to build," he said. "There are a lot of companies that can support that kind of technology, but what you need for collaborative filtering to work is a big enough network of users so that their recommendations are relevant. Their database needs to have some substance to it."

Indeed, even though McQuivey speculated that CBS may be after Last.fm's technology, it's not going to be easy to scrobble other CBS content. "Scrobbling, as Last.fm currently defines it, applies well to music," he explained, "but is not as readily applicable to video or news--content that CBS has aplenty."

There's also the legal side. Virtually any major social-media acquisition these days comes with courtroom baggage: just look at Google's purchase of YouTube.

Last.fm, however, has thus far managed to steer clear of the copyright issues that have plagued the digital music industry since Napster's heyday in the late 1990s.

"They seem to be doing everything right on the copyright side," said Randy Lipsitz, an attorney with the New York-based firm Kramer Levin. "They're not allowing unauthorized downloads; they're paying royalties for streaming; there don't appear to be any file-sharing activities going on. They appear to be getting the right legal advice to protect them."

But while CBS may have just acquired a social-media site that's managed to stay clean in regards to copyright, the congressional debate over a scheduled increase in royalties paid by Internet radio sites will undoubtedly come into play soon.

CBS has a big enough purse to pay those royalty fees, but such a situation would make Last.fm less profitable.

"The numbers that I've seen don't look sustainable by the current audio advertising landscape," Card said. The situation, he added, will remain complicated as Last.fm continues to ink deals with more major music companies for its streaming-radio feature. "If you're a publisher or an artist or a label, why should you fund somebody's business model that doesn't work?"

According to McQuivey, selling music may be the answer for CBS. "The latest scoop is that regulators are inclined to intervene in the rate hikes, and the music industry is offering protection for small Internet radio stations to ward off regulators. All of this means we won't expect a resolution any time soon," McQuivey said. "But the pressure of price hikes is leading more and more online radio stations to push for music sales as a way to increase revenue, since advertising revenue alone won't cut it if rates go up. That's why you see (Last.fm rival) Pandora signing up with Sprint to become a music merchandising system, enabling the download and purchase of music."

Ultimately, CBS may have a plan for dealing with potential issues that surface with its new music acquisition. If the company were too volatile, Lipsitz said, CBS wouldn't have forked over $280 million for it.

"I would like to believe that CBS analyzed all of that and came to a conclusion," he said.

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