Grooveshark, a startup from a group of University of Florida students, is aiming to shake up the music industry by compensating file sharers for putting their music libraries on a peer-to-peer network. Their interesting approach, which is currently in a closed alpha test, is one part Last.fm, one part Limewire, and one part iTunes store.

On the surface, Grooveshark most resembles a Last.fm-style social network. The web site scans your music collection and serves up recommendations based on people with similar musical tastes and user behavior. It's built around a simple social network with friends lists, messages and a standard profile page.

The recommendations Grooveshark gives seemed mostly spot on, with a few oddities here and there, but should certainly improve as more users add data to the network. When I uploaded music from the hip-hop artist Buck 65, for example, Grooveshark recommended Atmosphere and Aesop Rock -- two of Buck 65's contemporaries. Users can browse each other's music libraries and stream tracks from anyone who is online (as I write this, I am listening to Betterman, by Pearl Jam streamed from another user). But where Grooveshark really differentiates itself, is that any track on your computer shared with the site, is put up for sale over their Java-based peer-to-peer client, Sharkbyte.

Tracks cost $.99 and Grooveshark promises to fairly compensate all artists. Paying artists is "one of the most complicated parts of Grooveshark," Josh Bonnain, who is in charge of Strategic Relations for Grooveshark, told me. "The process oftentimes involves sifting through huge amounts of untagged or mislabeled content that show up as a result of all the discrepancies in many MP3 files that are floating around out there, but we make it our job to dig through every track that is downloaded in Grooveshark and determine the appropriate rights holders."

Grooveshark takes what Bonnain calls a "three-pronged approach" to sorting out who gets paid. Community-driven data, such as ID3 tags, online music identification databases, and manual verification by their staff.

Artists aren't the only ones getting paid on Grooveshark, however. The company plans to split profits with users 50/50 after royalty payments to artists, publishers, and other rights holders. Which users get the biggest share of that money is determined by a number of factors, including community involvement (verifying ID3 tags, recommending songs, etc.), who contributes the most bandwidth, etc. The more you involve yourself in the Grooveshark community, the more often your songs will be the ones that get sold.

Grooveshark is definitely still alpha software, and was not without problems. A couple of pages seemed to be missing completely (like the "Fans" page, which presumably shows who has a given track, but gave me a 404), and when I uploaded some free music (that is given away on the artist's web site) Grooveshark automatically put the $.99 price tag on it. When I asked Bonnain about that, he told me that they employ a person full-time whose job is to identify free-license music. "If we ever do detect that a user has paid for a track that should be free, we will refund the cost of the track to the user and flag the track as free from that point forward so the issue doesn't repeat itself over and over again," he said.

Conclusion

Will Grooveshark work? It's tough to say. Presumably, they only index DRM-free music people have on their computers, and the prospect of paying $.99 for DRM-free tracks while still compensating the artist is an attractive one. But buying music from unverified sources (i.e., the quality of music you download on Limewire isn't always as good as the music you might purchase from iTunes) could scare off some users. And users profiting from music they may have stolen from other P2P networks could cause distaste among major labels.

But if Grooveshark can get the labels on board, it seems like a win-win proposition. Artists and labels are fairly compensated, and users are encouraged to pay for and share their music (by the prospect of making money on the back end). What do you think? Does Grooveshark's method make sense? Do they have a chance?