In 2008, Janus Friis and Niklas Zennström, the Scandinavian founders of Skype and Kazaa, started working on Rdio because they were convinced that music listening is shifting permanently from a download model (like iTunes) to one streamed on-demand from the cloud (like Pandora).

Initially with funding from Zennström's venture capital firm—when Skype was sold twice in recent years, Friis and Zennström reportedly earned close to $1 billion in the process—they set up shop in San Francisco. They also asked Drew Larner, a former movie executive with 20th Century Fox and Spyglass Entertainment, to be CEO. (Larner had met Friis and Zennström 10 years ago, when they were still working at Kazaa, the controversial online music-sharing service.) 

Rdio users can now play any of 15 million songs from the likes of Justin Bieber, the Beastie Boys, and Coldplay—and never hear an ad—from the web or an app, and share (or discover) music in real-time with friends. 

What distinguishes Rdio most is that—unlike many Internet publishers that rely heavily on advertising revenue—the company is going after a subscription model from the start instead. "It’s a very disruptive [music] experience to have to listen to an ad all of a sudden," says Larner. "We wanted to keep the experience clean and felt like we'd be able to offer something that was compelling enough to get people to subscribe."

Rdio users can listen on an Internet browser or Rdio desktop application. After hearing an undisclosed number of free songs (users see a meter "run out"), they are required to pay $5 a month. An additional $5 monthly fee applies to listen to music on the go with Rdio's iPhone, Android, Blackberry, and Windows 7 smartphone mobile apps. "Ten bucks is roughly the cost of an album, and with us, you're getting access to everything," says Larner. 

But the subscription model still pins Rdio up against established behaviors. Consumers are not accustomed to paying for online content. Less than 10% of revenue in the Internet publishing industry comes from paid subscriptions, according to IBISWorld.

And if they're going to pay, says Jack Plunkett, CEO of Plunkett Research, "consumer preference is to own the music."

Larner attributes consumers' slow shuffle toward paid subscriptions to an emotional disconnection from digital content. "In the past you showed people that rack of albums you had in a milk crate and said, 'Look, this is who I am,'" he says. "We believe Rdio expresses that really well in the way the service is built, but getting people over that hump is a challenge."

Rdio is focused on overcoming that challenge. With a reported $17.5 million in financing, Rdio is trying to make finding and sharing new music easier. The company recently upgraded to a faster browsing speed and continuously-scrolling interface. Each user can display most-played songs and artists on a profile, "follow" friends and other members, and share music with Facebook friends. Says Larner: "Once people see that everything is there—they can listen to [Rdio] on any device, they can listen to it on a plane, they don’t need an iPod or iTunes—they’re hooked."