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Rdio debuts cheaper streaming, but can it reach a wide market?

Digital service Rdio is introducing a new $3.99-a-month tier

Digital service Rdio thinks it knows what most people are willing to pay for streaming music -- the price of one latte a month. 

The company (name pronounced "Ar-dee-oh") has struggled to make its mark on the fast-growing online music market with its $10-a-month unlimited music service, and its free ad-supported version.

Now Rdio is hoping it can find its sweet spot and reach a wider audience to take on industry leaders Spotify and Pandora

The company is introducing a new $3.99-a-month tier that executives say will appeal to laid-back customers who enjoy the ease of online radio while also giving them a taste of the on-demand side of the business.

Users will be able to stream Rdio's radio stations without commercials. They can also download and keep up to 25 songs at a time. 

To explain the reasoning for the new price point, Rdio Chief Executive Anthony Bay points to a 2013 study that found iTunes users spend an average of $40 a year on music -- the equivalent of just four album downloads.

"There hasn't really been a subscription service targeting that," he said. "[$10 a month] is the business class of the streaming plane. We haven't had coach yet." 

That's not strictly true. The service, dubbed "Rdio Select," is similar to Internet radio company Pandora's paid version, Pandora One, which costs $5 a month but doesn't offer the ability to download or keep tunes. Rhapsody also has a $5 monthly program called unRadio

Pandora's subscription revenue totaled about $54 million in the first quarter of the year, or just 23% of its total sales. Pandora One most recently counted 3.8 million subscribers. 

Music streaming services have experimented with a variety of pricing schemes, including family plans and discounts for college students. Some, including Jay Z's newly relaunched Tidal, offer no free version at all. 

Though Rdio has never released user statistics, it is thought to lag far behind industry leader Spotify's 15 million paying subscribers and 45 million freeloading users. Pandora says it has more than 79 million monthly active users.

"While Rdio remains a relatively small online music player versus Spotify and Pandora, it continues to invest and expand its product offerings chipping away at listening hours among its competition," said BTIG analyst Rich Greenfield in a blog post.

Spotify's popular free version has become a sticking point for record labels and some prominent artists, including Taylor Swift. Unlike Rdio, it gives users unlimited on-demand access to its full catalog. Critics including Bay say that version of the "freemium" model gives too much away and doesn't give people enough reason to pay up. 

"All free isn't created equal," he said. "The premise that if you give something away for free, you'll get people to pay is silly. We think those forms of free are too good and they hurt the business." 

Bay hopes his $4 version will be low enough to get people in the door so that they might eventually upgrade to the all-you-can-eat model. 

The new version of Rdio comes as the music industry's 800-pound gorilla, Apple, is preparing to launch its own streaming service following its $3-billion acquisition of Beats. Bay said the timing of his new offering is merely a coincidence. 

"Timing your life around guessing what Apple's going to do is not a good business plan," he said. "We've been working on this for a long time."

Follow Ryan Faughnder on Twitter for more entertainment business coverage: @rfaughnder

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