Online jukebox Lala hooks up with Facebook and Google. Together, can they mount a serious challenge to Apple?

Lala's Nguyen aims to challenge Apple's iTunes. Photo: Lala

Apple rules music retail for now: iTunes passed Wal-Mart (WMT) last year to become the top-grossing music store in the world. But that doesn’t mean things will stay that way.

The latest challenge to iTunes comes from Bill Nguyen, the serial entrepreneur who founded Lala.com.

Palo Alto-based Lala is an online jukebox with 8 million songs; you can buy the rights to stream a radio-quality version of any song for 10 cents or download a higher-quality version for 99 cents. He says he’s averaging about $67 per year from paying customers.

By itself, Lala poses no threat to the iTunes juggernaut. But now it’s teaming up with Google (GOOG) and Facebook, arguably the two hottest properties online. Late today Google is expected to announce a partnership with Lala that should drive massive amounts of new traffic to the service.

And just last week, Lala announced that it will team up with Facebook and its 300 million users to push a new form of music distribution: song gifting. Soon, Facebook’s legions of social networkers will be able to do more than chat, update and poke — they’ll be able to buy each other songs, right within Facebook’s payment system.

We caught up with Nguyen soon after the Facebook announcement to ask about his vision for digital music, and why he dares to take on iTunes and Apple (AAPL).

Fortune: What’s the elevator pitch on Lala. What business are you in?

Nguyen: We’re a music service. But I think what makes us different from some other music services is we focus so much on helping you discover new music by using social behavior. There used to be such great radio and MTV that would help us find music, and a lot of those sources don’t really exist in the same way anymore.

So how long did it take this deal with Facebook to come together?

We’ve been having conversations with a lot of different partners about how to make Lala a part of what they do. There’s a lot of music out there — there are 8 million tracks. A lot of companies say, “there are 8 million tracks, come to our site and knock yourself out.” The reality is none of us have the time or the patience or even the knowledge to find what we want to listen to.

So we’ve been working for the last couple of years to try to add context. We launched a service with CMJ, we launched something with Pitchfork, we launched something with the guys at Billboard. And the reason why we did that is, those guys are curators. They were telling people what was good. In summer of this year, the conversations really picked up around, how can you connect with some much bigger websites? We’ve been talking to Facebook for almost a year about how to take advantage of all the amazing social features they have on their site. It’s been an ongoing process.

You’re going to be selling 10-cent song streams and 99-cent downloads. Right now you deliver about 5 million songs a month. What do you expect these new partnerships to do for your business?

It takes music and makes it a new product, in the same way that ringtones did. You buy ringtones to tell everyone else what you like, not for your own personal listening. So I describe it as jewelry, in a way. Gifting is like that. It’s a really cool way of expressing how you think.

We think what’s exciting about gifting is, people don’t have to even give us money. They can use the payment system already built into Facebook, which people are already using for everything from games to personal gifts already. It’s kind of like a greeting card. When you get it, it’s inside of your feed and you can listen to it.

So the social aspect is what makes this different from iTunes.

It is. We live in this age that I think is the best time for music, ever. It’s so much easier to create music because there are digital tools like pro audio. There are really no limitations for distributing your music like there used to be. You really don’t need a label or a studio to get your music out there. But iTunes doesn’t help you find out what to listen to. It just gives you the top lists. [Editor’s note: The latest versions of iTunes actually do include “genius” song recommendations based on your interests.]

Why are virtual gifts such a big deal?

Gifts are driven by events. I can give someone a song because I want to say something to them, personally. We think it’s so much more targeted than just browse and collect your music. It’s a very personal thing. And what’s nice about it is, it’s already happening. It’s not a new business model. Virtual gifts on the web are actually a really big business. It’s everything from what Facebook’s doing to Zynga with games. We think giving music is so much more tangible. People might not know what a virtual carnation is, but they definitely know what a song is.

How will the economics work for Lala? How much will you make from each sale?

I got in trouble for talking about it. I’m not allowed to talk about it anymore. But we’re happy with the relationship. One of the unique things about the Facebook relationship is they’re handling the billing and the credit card transactions. It’s a great deal. We’re really happy about it.

I’ve seen you quoted as saying it’s similar to the split that Apple does on apps in iTunes, so you get 70%, Facebook gets 30%.

I’m really not allowed to talk about it anymore.

You’ve also been working on some mobile stuff. What can you tell me about the iPhone app?

That’s a really good way to segue into some of the things we’ve been doing. On a mobile, it’s really not easy to get a song over the air. There are no free streaming services on the mobile platform [for streaming specific songs]. When you buy a song on Lala, whether it’s Facebook or anything else that we do, that music will be instantly available on a mobile device. That will be beginning with the iPhone.

It’s streaming. You’re hardly going to know the difference between that and an MP3 file. It’s flawless. There’s smart cacheing so it’s available offline for you if you’re in a bus or lose the connection. It’s pretty amazing.

Back to the future: Straight Talk phones like the LG 200C might be dowdy, but growth in the prepaid market could eventually squeeze carrier profits. Photo: LG.

Look out, U.S. wireless carriers: Wal-Mart is teaming up with billionaire Carlos Slim’s América Móvil to train its price-crushing might on cell phones.

In time for the holiday season, the mega-retailer on Wednesday announced a nationwide roll-out of the new prepaid Straight Talk service, offered through América Móvil subsidiary Tracfone Wireless. Unlike mainstream wireless plans that pair cutting-edge phones with higher monthly fees and multi-year contracts, pre-paid services like Straight Talk offer cheaper phones, lower fees and no contracts.

Wal-Mart will offer two Straight Talk options: a $30 monthly plan that comes with 1,000 minutes, 1,000 texts and 30 megabytes of data, and a $45 monthly plan with unlimited voice, texts and data. Straight Talk uses Verizon’s (VZ) wireless network.

The bargain-basement prepaid approach makes sense in a down economy, where consumers are looking for cheaper options and fewer can pass the credit checks that come with traditional phone plans. Prepaid plans have been a hot ticket in this market, which explains why Wal-Mart (WMT) is taking Straight Talk from a year-long pilot in 234 stores to a nationwide, 3,200-store launch.

Why does this matter? It’s not just about price. The all-you-can-eat Straight Talk plan is only $5 per month cheaper than offerings from rival Boost Mobile – plus, the Straight Talk phones aren’t going to impress anyone. The cheapest, the LG 200C, costs $40. The somewhat better looking Motorola’s (MOT) RAZR V3A is $100. Both might have been cool four years ago, but not today.

No, the interesting thing here is the evolution – and proliferation – of prepaid.

With Wal-Mart in the game, the other pre-paid players will feel pressure to offer both lower prices and cooler phones; and with low-cost smartphone software like Android gaining steam, it’s only a matter of time before decent smartphones arrive hit the prepaid market. (Sprint (S) CEO Dan Hesse said as much at Fortune’s Brainstorm Tech conference in July.)

Over time, those cooler phones and no-contract plans could start to lure customers away from mainstream wireless services. That’s good for penny-pinching consumers, but bad for carrier profits.

Source: NPD Group

The NPD Group on Tuesday issued what at first appears to be a pair of contradictory facts:

• Apple (AAPL) now controls the largest share of the music business, its iTunes Store accounting for 25% of unit sales in the first half of 2009, up from 14% in 2007.
• Compact discs are still the most popular format for paid music, accounting for 65% of unit sales.

How can this be? The trick is that Apple controls the lion's share — 69% — of paid downloads, whereas CD sales are spread out among many players, chief among them Wal-Mart (WMT), Best Buy (BBY), Amazon (AMZN) and Target (TGT).

To see better how this works, let's put the data into pie charts:

Source: NPD Group

Source: NPD Group

Source: NPD Group

Not covered in the NPD report, of course, is music piracy, which according to a recent U.K. report accounts for roughly 18% of music downloads — which would put it ahead of Amazon but well behind iTunes.

AT&T (T) on Saturday began offering refurbished iPhones for the lowest price yet seen in the United States:

• $99 for a black 8GB iPhone 3G (refurbished)
• $199 for a black 16 GB iPhone 3G (refurbished)

The price points are not entirely unexpected. For several weeks before Christmas, Apple (AAPL) blogs were buzzing with rumors that Wal-Mart (WMT) would be selling a new version of Apple's iPhone at the magical $99 price.

But it was not to be. On Friday, Wal-Mart confirmed that starting Sunday, Dec. 28, it will carry the hot-selling phone at nearly 2,500 stores — but starting at $197, not $99.

AT&TS's $99 iPhones are the same old models, slightly used.

According to the small print on att.com,

Refurbished phones are previously owned devices that have been unused or lightly used and returned during the 30-day trial period. Each refurbished phone is independently quality tested and loaded with the latest software to meet current factory standards. Some refurbished iPhone 3G devices will have minor scratches.

Refurbished iPhone 3G devices carry a warranty of 90 days or more. For details about the warranty on your refurbished iPhone 3G go to www.apple.com/support/oss/.

The catch? The heavily discounted phones come with the usual 2-year contracts, which can cost up to $2,000, depending on the plan.

The sale ends Dec. 31 or when AT&T runs out of stock, whichever comes first. Macworld Expo starts the following week, leading to speculation that AT&T may be using the occasion to clear inventory in advance of new models or new memory configurations.

Wal-Mart confirmed Friday what everyone who follows Apple already knew: that it will begin selling Apple's iPhone 3G at nearly 2,500 Wal-Mart stores starting Sunday Dec. 28 — three days after Christmas.

Wal-Mart will sell the red-hot mobile device for $197 for the 8GB model and $297 for the 16GB model, or $2 off their current prices. There had been rumors that Wal-Mart would sell a $99 iPhone. (See Anatomy of a rumor: Wal-Mart's $99 iPhone.)

Wal-Mart, however, appears to be giving individual store managers some wiggle room on prices. According to the press release, the company's price match policy will allow stores to "match the price of any local competitor's advertised store price on the same item within the same promotional period." Best Buy is offering the iPhone for $190 for the 8GB and $290 for the 16GB models.

Getting the iPhone into Wal-Mart (WMT) is something of a coup for Apple (AAPL). Wal-Mart is the world’s largest retail chain — by far — with more than 7,000 mega-stores around the world and some 2.1 million employees. It finished its last fiscal year with nearly $380 billion in sales — earning it the No. 1 slot in the Fortune 500.

The move represents the fourth major expansion of the iPhone’s retail presence outside Apple’s own 200-plus stores. The phone was sold first at AT&T’s (T) 2,000 retail outlets, then at nearly 1,000 Best Buy (BBY) outlets (see here), and then at the tens of thousands of points of sale (many of them no more than mom-and-pop kiosks) that carry iPhones for Apple’s overseas partners.

Piper Jaffray’s Gene Munster has estimated that Apple could easily sell as many iPhones through Wal-Mart stores in 2009 as it sells through its own Apple Stores — by his calculation, about 4.5 million units. See here.

Kaufman Bros. analyst Shaw Wu has been checking with his contacts in Apple's (AAPL) supply and distribution channels and reports that demand for the iPhone is "fairly healthy" in the U.S., Europe and, with the exception of Japan, most of Asia Pacific. He's anticipating sales of 6 million units for the December quarter (Apple's fiscal 2009 Q1), down from 6.9 million in Q4 but in line with the Street's expectations of between 5 and 7 million.

But that significantly understates actual demand for the iPhone, Wu says, because it doesn't include the wild card in this holiday season's iPhone sales: the iPhone gift card.

"We think there is strong reception of AAPL's new iPhone 3G Gift Card program," Wu wrote in a report to clients Wednesday, "where the process of giving the iPhone as a gift is greatly simplified without the need for activation and personal information. … We estimate several hundred thousand to one million units could be impacted."

The good news about these gift cards is that Apple gets to collect the revenue up front, which improves cash flow. The bad news for Apple's Q1 earnings is that it can't recognize the sale of an iPhone until the customer activates it. "The risk here is that the customer will likely activate post-Christmas," writes Wu. "Therefore revenue and units won't likely be recognized until the March quarter."

In a separate note issued Tuesday, Piper Jaffray's Gene Munster took a stab at estimating how many iPhones Wal-Mart (WMT) is likely to sell when it, as reported, begins carrying the devices three days after Christmas. Bottom line: Apple could sell as many iPhones through Wal-Mart in 2009 as it sells through its own Apple Stores. Munster's math:

"Our analysis begins with a simple count of 3,500 U.S. Walmart stores and 208 U.S. Apple retail stores. We are modeling for Apple to sell 45m iPhones in CY09; we assume that 30% (13.5m) are sold in the U.S., and one third of U.S. iPhones (4.5m) are sold at Apple retail stores. In other words, we believe the average Apple store will sell about 22k iPhones in CY09. In order for all 3,500 U.S. Walmart stores to sell as many iPhones as the Apple retail channel (4.5m), each store would need to sell 1,284 iPhones in CY09, or 6% of the total annual volume of each Apple retail store. We believe a Walmart store would likely sell a small fraction of the units that an Apple store would, but we also believe that 6% on a unit-basis is achievable."

UPDATE: Morgan Stanley's Kathryn Huberty, an analyst with a dismal record of predicting iPhone sales (see here), cut her Q1 estimate Wednesday to 4 million iPhones, down from 4.5 million (link). Her sales estimate for calendar 2009 of 14 million iPhones represents the bearish low end among Apple analysts. Munster's 45 million units is the bullish high.

The blogs and business wires were buzzing Monday morning with two juicy iPhone rumors: 1) That Wal-Mart would begin selling iPhones three days after Christmas and 2) That a low-end model would sell for $99.

The first, as we reported nearly three weeks ago, is true. (See Wal-Mart's post-Christmas iPhone sale.)

The second, as near as anyone can tell, is almost certainly not true – although it seems to have taken on a life of its own, most prominently in a Bloomberg.com report published Sunday evening.

On Monday morning, MacRumors reported that, based on leaked Wal-Mart training and advertising material, the $99 iPhone rumor was "unlikely." MacBlogz went further: "Based on every piece of information we’ve heard, and direct information inside AT&T, this is not happening."

So how did the story get rolling?

It started with the Boy Genius Report. a blog with back-channel contacts at AT&T  (T) that have often proved reliable. In fact, the news that Wal-Mart (WMT) would be selling Apple's (AAPL) iPhone originated with Boy Genius, although the date that sales would begin was fuzzy until a Boy Genius reporter got his hands on an AT&T memo spelling out the timeline for in-store training  and national rollout. (link)

The $99 iPhone rumor, although originating from the same site, had a very different feel to it. The Boy Genius report posted on Dec. 4, started like this:

"We just got a tip that in addition to the iPhone 3G actually making its way to Walmart, as we exclusively told you, there will be a 4GB model priced at $99 with a 2-year agreement. We’re not putting our stamp of approval behind this one just yet as the tipster isn’t listed in our BGR’s Guide to respected Ninjas handbook, but it does make you think, doesn’t it?" (link)

The $99 rumor got conflated with the Wal-Mart story in subsequent reports — after all, they both came from the same blog, right? — and received what was taken by some as confirmation when Shaw Wu, an analyst who follows Apple for Kaufman Bros., addressed it in a report to clients:

"While we are not sure of exact timing, we think a $99 Apple-branded cell phone is inevitable." (link)

Wu's remarks were picked up by Bloomberg's Connie Guglielmo, and by Monday they had made their way to the top of the online news food chain at Techmeme.com.

In fact, the iPhones at Wal-Mart will be sold at a discount, as VentureBeat reports and the ads leaked on MacRumor confirm: for $197  –  $2 off the $199 list price.

The Boy Genius, for his part, hasn't backed off his initial report, but neither is he fully endorsing it. "Waiting for some feedback from a couple sources," he wrote in reply to an e-mail inquiry. "At this point I just don't know."

Neither Apple nor Wal-Mart would comment on the rumors.

We're getting an unusually sharp divergence of expert opinion on how well the iPod is likely to do this holiday season.

The conventional wisdom — reflected in Arik Hesseldahl's "Apple's iPod Problem" in Businessweek — is that everybody who wants an iPod already has one, and doesn't see much reason to upgrade, especially with the economy in the dumps. "As a result," he wrote, "some analysts believe this will be the first quarter since the iPod was introduced in 2001 that sales will decline from the year-earlier quarter."

Piper Jaffray's Gene Munster is one of those analysts. He's projecting sales of 18.6 million units in Apple's December quarter, down 16% from 2008 Q1.

A cooling off of this magnitude would mean that Apple' (AAPL) other business units — chiefly the Mac and the iPhone — need to pick up the slack if the company is to continue the quarterly growth to which investors have become accustomed.

But the reality on the ground, according to Kaufman Bros.'s Shaw Wu, is that iPods are selling like Christmas hotcakes.

In a note issued earlier this week, he reported that Amazon (AMZN), whose giant warehouses tend to have plenty of iPods in stock, was reporting a backlog of several models.

"iPod touch was surprisingly stocked out and now has lead times of 11 days for the 8 GB model and three to five weeks for 16 GB," Wu wrote. "This is likely due to unexpected strong demand and we find this interesting as iPod touch is Apple's highest-end iPod." (link)

Now AppleInsider's Katie Marsal reports that Apple is "scurrying to restock some of its reseller channels" as those iPod shortages spread.

In a new report to clients issued Wednesday, Wu writes that spot checks are turning up shortages at Best Buy (BBY), Target (TGT), Wal-Mart (WMT) and Crutchfield.com.

"Frankly, we find these sell-outs on iPods surprising, given how difficult the macroeconomic environment is," he told clients. "From our assessment, we believe iPod is holding up better than most, due to its relatively low [selling price] and strong consumer understanding of the value it provides." (link)

Wu estimates that Apple will sell some 21 million iPods this quarter — less than the 22 million it sold the year before, but not by much.

The mystery of Steve Jobs' iPhone retail strategy deepens with reports that Apple (AAPL) will begin selling its smartphones at Wal-Mart (WMT) three days after Christmas.

According to the Boy Genius Report, a blog with relatively reliable backchannel sources at AT&T, Apple will start with select Wal-Mart and Sam's Club outlets on Dec. 28, and eventually roll the iPhone out to 2,500 Wal-Mart owned stores.

The deal, if confirmed, would represent the fourth major expansion of the iPhone's retail presence outside Apple's own 200-plus stores — first to AT&T's (T) 2,000 retail outlets, then to nearly 1,000 Best Buy (BBY) outlets (see here), and then to the tens of thousands of points of sale (many of them no more than mom-and-pop kiosks) that carry iPhones for Apple's overseas partners.

This is a move of different magnitude. Wal-Mart is the world's largest retail chain — by far — with more than 7,000 mega-stores around the world and some 2.1 million employees. It finished its last fiscal year with nearly $380 billion in sales – earning it the No. 1 slot in the Fortune 500.

All of which raises the question of timing. If you're going to bring the iPhone to Wal-Mart, why not do it before Christmas — as originally rumored — rather than after?

Below the fold: An AT&T memo with a timeline of the Wal-Mart rollout, as posted Wednesday by the Boy Genius Report:

We are pleased to announce that Wal-Mart has reached agreement with Apple to offer iPhone 3G in Wal-Mart and Wal-Mart-managed Sam’s Club* Connection Centers nationwide beginning December 28, 2008.  AT&T will support Wal-Mart and Sam’s Club with the activation process for iPhone 3G, and we need all National Retail employees engaged to ensure a successful launch.

*NOTE: This product launch DOES NOT apply to SC Kiosks within Sam’s Club managed by Radio Shack.

Wal-Mart has communicated the following launch plans and execution timeline to their employees:

• iPhone 3G will be available in-store only beginning 12/28/08
• New and existing customers in good standing can purchase iPhone 3G with a 2 year contract
• iPhone 3G transactions only will be processed through POS.com, not the kiosk

Execution Timeline:

• 12/2 – 12/5:  AT&T / Wal-Mart MEM Classroom Training for Store Leads
• 12/3 – 12/19:  AT&T In-Store Training
• 12/26 – 12/27:  AT&T In-Store Refresher Training
• 12/28: Nationwide Launch
• 12/28 – 12/30:  Wal-Mart and AT&T War Room Support

(link)

After a confusing 24 hours in which Apple watchers struggled to reconcile a Feb. 26 press release from the company that proclaimed iTunes the No. 2 music retailer with NPD data that showed iTunes in the No. 1 spot six weeks earlier (see here), Apple (AAPL) on Thursday issued a new press release declaring itself No. 1 for both January and February. The key sentence:

Apple® today announced that the iTunes® Store (www.itunes.com) surpassed Wal-Mart to become the number one music retailer in the US, based on the latest data from the NPD Group*. (link)

Note the footnote, which reads:

*Based on data from market research firm the NPD Group’s MusicWatch survey that captures consumer reported past week unit purchases and counts one CD representing 12 tracks, excluding wireless transactions. The iTunes Store became the largest music retailer in the US based on the amount of music sold during January and February 2008.

Guess that clears it up.

Coincidentally, three of the four big music labels also made a big music announcement Thursday afternoon: a deal with MySpace to build what a spokesman describe as a one-stop music site that will offer downloads, ad-supported streaming and music sharing services. Downloaded music would reportedly be compatible with all MP3 players, including iPods. See here.