The Internet radio space is crowded with sites like Pandora, Rdio and Slacker and more join the fray every day. The formula is a simple one: get blanket licensing to play songs in a similar way to terrestrial radio and plug in some ads for detergent or whatever product the music demographic seems to suggest.

Earbits is breaking that mold by offering the freedom to bounce around between genres, unlimited skipping of songs and advertisements that relate specifically to the artists being played. In fact, the advertisements become a sort of bulletin board that allows you to see upcoming shows, purchase merchandise that they have for sale and participate in promotions that the artist or their label has going.

I spoke with Joey Flores and Yotam Rosenbaum about what sets Earbits apart from the crowded space. They were quick to point out that the way that they licensed music was a big reason that the music playback experience on Earbits is superior. Because music is licensed for playback on Earbits and not in blanket ‘compulsory license’ fashion, like Pandora for instance, they are able to negotiate the ability to skip around freely and break their streams down into discreet genre channels.

Flores has had an interesting history, dropping out of high school at 16, he was in L.A. by 18 and worked as the head of business development for a startup. After a buyout and growing their business from $19 to $48 million he left and started a band with Yotam Rosenbaum. Rosenbaum went to school in Israel, then later graduated Magna Cum Laude from Berklee College of music with a degree in composition. After a time composing music for TV shows, commercials and music and producing CDs for other artists, he and Flores joined up to create Earbits. Both are drummers.

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Each of the 70 channels on Earbits has enough music for many days of casual listening. You can definitely start to hear a few repeats of songs after listening to a channel for a while but it should take much more time than it does on other services. In addition, you won’t have to listen to roughly the same mix of songs every time you log on as you do with Pandora. Currently, Earbits has 100 labels, 1,500 artists and 20,000 songs in its library.

Most of those artists are on indie labels so far because it’s easier to negotiate deals but Flores says that Earbits is definitely pursuing major labels as well. Some of the more popular artists taking part in the service include Weezer, Talib Kweli, KRS-One and Alkaline Trio. The unique control that Earbits gives artists over what gets advertised while their song is playing should have wide appeal. Instead of a random advertisement for detergent or Bacardi, the large display area dedicated to the artist will be filled with relevant information or offers.

You may see an advertisement for the artist’s album, a list of merchandise with purchase links or promotions that you can enter your email address in to win. Earbits also uses Geotargeting to slide out a pane that shows you upcoming shows for that artist within a 50 mile radius of your area. The pane links you right to ticket sales for those shows. It’s a unique take on advertising with an app like this and one that is much more artist-centric and more likely to engage the listener. If you’re listening to a band that you love you’re more likely to click on an ad for their album or a show rather than a random ad for beer.

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The greater level of choice in the songs that you listen to and the more focused ad system aren’t the only innovative features of Earbits. The Facebook sharing bar that appears when you log into Earbits via the FB connect option is also very cool. You’re presented with a bar across the bottom of the screen that has your Facebook friends lined up in a row. You can then send any song that you’re listening to as a recommendation to one of those friends. If the preferences of a friend’s Facebook profile suggests that they would like to hear the song that you’re listening to they will be highlighted in orange. This allows you to share songs with friends that you know will like them.

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The artists’ bio sections on Earbits are also a very nice touch. There you can listen to more tracks from the artist, check out their website and Facebook page, read a biography and follow them on Twitter if available. This is much more involved than most internet radio sites and a refreshing change from the simple album/artist/artwork displays on sites like Pandora.

Earbits is in the midst of proactively expanding their catalog and marketing the brand to customers interested in creating channels for their brand. The Viper Room in L.A. recently had a channel dedicated to songs from artists scheduled to play the venue. Deals like this will be a big part of Earbits future, says Flores, and they have deals coming up with large content providers for similar promotions.

Currently Earbits is funded by a number of investors including Geoff Ralston and Y-Combinator. You may remember Ralston as the CEO of LaLa, the music streaming service that was swooped up by Apple last year.

At the moment, Earbits is concentrating on the browser experience, although they do have Android and iPhone apps that have the simple listening features enabled. If you’re interested in listening to good music, largely consisting of fairly lesser known bands, then Earbits is worth your attention. If it manages to sell the larger labels on the individual licensing scheme that allows the increased amount of control and focused advertising options though, Earbits could become a major contender very quickly. Either way I’d recommend heading over to the site to check it out now.