It was only 12 months ago when record labels viewed used CD-trading company as one big infringement machine, with some label execs refusing to even consider doing some kind of business deal with the upstart.

“This is a nudge-nudge, wink-wink way to get around the law,” EMI’s senior VP of digital development Ted Cohen told the Los Angeles Times in June 2006. “It makes it easier for people to copy CDs and steal music. Why would the music industry do anything to encourage a company like that?”

The Lala concept is simple enough. Users list CDs they already own as well as the discs they would like to acquire while Lala works the back end by hooking up those who have with those who want. For every used disc a member sends to the Lala brethren, a desired CD is sent in return.

So it was no surprise that record labels wanting to sell new CDs were ticked off about a Web site enabling people to trade used CDs. After all, it’s hardly a stretch to imagine CDs being traded, ripped and then traded again.

But the recent news that Lala announced an “agreement in principle” with Warner Music Group to sell unprotected music downloads did catch a few people off guard. What’s more, this isn’t your typical online music store scenario.

First of all, Lala members can have any song covered under the agreement streamed to their computers at no charge. Lala picks up the tab by paying the label a penny for each song streamed.

Then there’s the downloading part of the agreement. Instead of selling individual tracks for downloading to computer hard drives, Lala is selling only CDs, dynamically priced mostly between $6.50 and $13.50. Furthermore, those downloads bypass hard drives by loading directly from Lala’s servers to iPods.

The philosophy behind direct-to-iPod is that, by cutting out the hard drive middle ground, the DRM-free Lala downloads will not contribute to music piracy. That’s because most pirated tracks originate on hard drives and the iPod is supposed to be a one-way street where songs are only transferred to the music player, not from the player to a computer. However, there are plenty of third-party utilities that will transfer iPod files to computers.

But it’s not the iPod factor that’s picking up media traction. It’s the concept that the labels need to give music away in order to boost sales that has everyone talking.

“The music industry is so desperate for new ways to make money that a Silicon Valley startup is trying a counterintuitive approach; giving the music away as a way to jump sales,” said the Wall Street Journal, describing Lala’s latest feature as a “music subscription service, but without the monthly subscription fee.”

However, streaming Warner Music Group tunes and selling direct-to-iPod downloads was only part of Lala’s busy week. The company also announced several other features, including online lockers where iTunes users can not only upload their libraries and then access the music from different locations, but also load music to their iPods from those lockers.

“The iPod is the greatest portable music device ever invented, and as avid iPod fans we wanted to create a service that blends the convenience of the Web with the portability and functionality of a truly universal platform,” said Lala founder Bill Nguyen. “Lala unleashes the Web’s power for playing music and safely sharing songs without the threat of PC viruses, spyware and other risks that are present on illegal P2P sites.”