For Bloomberg, the new legal product is an expensive test of the company’s ability to find a major revenue stream outside its core financial business. But it also raises the question of how a stodgy industry is responding to sweeping changes that makes it easier for Americans to look up the law.

Bloomberg’s big bet

The company owned by the mayor of New York City makes 85 percent of its money by selling a powerful package of financial data to approximately 300,000 clients at a cost of around $20,000 a year. But in 2005, Bloomberg first began to sniff out legal data as a potential new revenue stream. Right now, two incumbents, Westlaw and LexisNexis, divvy up the lion’s share of a market that is reportedly worth $8 billion a year.

By 2009, Bloomberg had an even bigger incentive to diversify as the financial crisis halted the growth of its cash-cow financial terminals. (The company is also expanding its media reach and launched BGOV, a pricey government data tool that is rumored to be struggling.)

Bloomberg’s plan to crack the legal duopoly is based on a two-pronged strategy — bundling legal research tools with its rich package of corporate data while also offering fixed pricing. By offering an all-you-can eat plan of $450 a month, Bloomberg hopes to capture clients who have been turned off by the complex metered pricing of its competitors (every lawyer has a horror story of some law student or first-year associate who ran up tens of thousands of dollars in fees with Westlaw or LexisNexis).

“The major difference here is that for years people have been looking for predictable pricing,” said Bloomberg Law CEO Larry Thomspon. He added the product’s appeal also lies in “the power of Bloomberg behind it — data and technology.”

The company’s move into law hasn’t been cheap, though. It has reportedly hired hundreds of lawyers to compile its database and last year it spent $990 million to acquire BNA, a publisher of legal and regulatory treatises. Bloomberg is also paying to sponsor the prestigious SCOTUSblog, the go-to source for Supreme Court happenings.

A 2010 review of Bloomberg Law likened it to a “luxury yacht partially constructed.” Today, the Bloomberg boat is nearly finished but it’s still unclear how many people will buy a ticket.

Build it and they (might) come

Bloomberg’s biggest challenge is not to build a better product, but rather to persuade people to try it in the first place. In this sense, the company’s legal database may face the same dilemma as a Windows phone or Google’s social network — many people just don’t see the point of trying a new version of something they already have.

Bloomberg’s arrival doesn’t appear to have cut into the duopoly’s pocketbook just yet. Last year, LexisNexis’ revenue remained flat at about $2.4 billion while Westlaw’s grew nine percent to $3.4 billion thanks in part to a new product called WestlawNext. In an email statement, Mike Dahn, senior VP for WestlawNext marketing, said that his company has been in the business for 125 years and it was confident of its position: “According to a survey of legal professionals conducted by the American Bar Association, and in our own surveys of law students, respondents consistently prefer Westlaw and WestlawNext over all other legal research services by a significant margin.”

Being well-established is no guarantee of future success, of course (see Kodak, Washington Mutual, etc.), but in this case the legal incumbents are able to throw up some formidable barriers to entry. This includes force-feeding their products to law students in order to entrench their hold on future lawyers. Bloomberg, however, has started to force its way into the schools, too, with the usual promises of freebies and more.

As for the product itself, Bloomberg provided a demo of its services for this story. The interface is clean and intuitive and should appeal to a generation of younger lawyers who are used to quick, Google-style searching.

Overall, Bloomberg appears to be making a slow and steady inroad into the duopoly. Thompson would not disclose if the project is making money yet but did point out that global law firm DLA Piper has puts its tool on the desk of every lawyer. Last month, the company also bagged Jones Day, another major firm with 1,800 U.S.-based lawyers.

“They’ve done a terrific job of getting large law firms to do a trial,” according to Ed Walters, CEO of Fastcase, a legal research service that claims to have 500,000 paid subscribers.

Law in a Digital and Social era

In the past, companies published large paper volumes containing an annual round-up of cases. Heavy and expensive, these legal collections could only be found in select libraries and law firms. In the 1980s, the search for law became easier when companies like Westlaw began compiling cases on computers and providing sophisticated searching mechanisms.

Today, digital technology is letting Bloomberg Law scan and sort a vast pool of law that would once have taken decades to assemble. But while its tools rival those of the incumbents, there is also a bigger question of whether the industry’s underlying business model is still viable.

That business model is based on charging lawyers enormous money to access a tightly controlled pool of information is still viable. It is also highly labor-intensive. Fastcase’s Walters described practices like Westlaw’s technique of reading and annotating cases as a “relic, an anachronism from the age of print … they’re acting as if search engines never existed.”

Fastcase’s own model relies on using algorithms to rapidly sort cases and track precedents. The company sells retail subscriptions for $95 a month and also offers bulk memberships to state bar associations.

Companies like Fastcase are far from displacing the giants, but they do illustrate how technology is allowing not just Bloomberg but upstarts to challenge a once impenetrable market. At the same time, Google and the Cornell-based non-profit Legal Information Institute are making stacks of cases, patent histories and more available for free.

Meanwhile, on the consumer web, the digital era is breeding new ideas about who should control the law. Kevin O’Keefe, whose LexBlog provides social media tools to lawyers, believes many attorneys are frustrated with the way legal materials are priced and packaged.

“This is our law. We created it. How did we get in a situation where other companies sell it back to us?” said O’Keefe, who predicts that law will become an open source type of public good.

All this doesn’t mean that Bloomberg’s big bet won’t pay off. It just means that it must defeat not only two Goliaths but also fend off a growing number of Davids who want to bring down legal giants altogether.

Law360 has been an acquisition target for years for companies like LexisNexis that make a business of selling research and practice management software to lawyers.

Law360 started in New York in 2004, and now has reporters in six different cities, including Washington and Chicago. The site is a highly paywalled operation that sells access to packages of newsletters, some of which reportedly cost tens of thousands a year. Clients include law firms and companies.

In a release, LexisNexis portrayed the acquisition as part of a strategic growth plan in which news is a key ingredient in the package of tools it sells to lawyers.

The purchase comes at a time of disruption for the legal industry and for the industries that provide services to it. The financial crisis eliminated both law firms and businesses, and led survivors to scrutinize operation costs. The crunch has also forced firms to be more vigilant about legal research costs which are typically passed on to clients in the same way as fax and photocopy expenses.

In this environment, companies like LexisNexis want to use news as a gateway to their research products and to encourage existing customers to keep their subscriptions. Thomson Reuters (NYSE: TRI), for instance, launched a specialized legal news team partly as a means to protect its market-leading product Westlaw.

With Law360, LexisNexis gains a product with an established news reputation that is also attracting a growing numbers of guest contributions from lawyers and opinion makers.

Law360 also has a reputation for running a lean operation. Most of its reporters work only from court filings and are expected to file four stories a day.

The Law360 acquisition is just one piece of a larger strategic puzzle. LexisNexis and Westlaw are also facing competition from a new Bloomberg legal product as well from start-ups and free legal services like Google (NSDQ: GOOG) patents and the Cornell-based Legal Information Institute.

LexisNexis is owned by research and academic publishing giant Reed Elsevier.