Digital Media

While it's waiting to be gobbled up by Google, AdMob isn't sitting still.

The mobile ad company announced Tuesday that it will deliver interactive video ads to the iPhone and iPod Touch devices. The ads, set to run this week, will let iPhone users surf the Web and check out other videos while the video ad is playing. AdMob believes advertisers and developers will take advantage of the video format by serving up interactive ads designed to pull in consumers.

"AdMob's new Interactive Video Ad Unit brings together consumers' love of watching videos on their mobile device with advertisers' goal of providing an interactive, social experience for consumers," said AdMob Founder and CEO Omar Hamoui in a statement. "We are excited to create new ways for advertisers to engage with consumers on their mobile devices and for the developers behind the most popular and engaging iPhone applications to effectively monetize."

The video ads will automatically pop up as iPhone users access certain content and applications. The ads will also offer a video player so that people can control and interact with them. To make sure the ads run at a decent clip, AdMob uses a network of distributed servers to push them out. Each video is saved in different file sizes, with the most appropriate one streamed based on the connection type, such as 3G or Wi-Fi.

AdMob is one of the top advertising providers for the handheld and portable device market, a position that convinced Google to cough up $750 million in stock to buy out the company. With its multimedia capabilities and huge market share, the iPhone has proven a fertile ground for video ads, with the first ones popping up in early 2008 and growing since then.

BoomTown--fresh from slapping around sixth-graders caught in a Bing-stupor and restaurant-seeking vampires from Microsoft--is not quite sure what to think of another new advertising campaign from an Internet giant.

This time, it is coming from eBay.

With the tagline, "Come to think of it, eBay," the ads start Monday, according to a report in The Wall Street Journal, to "boost its standing as a holiday shopping destination."

Interestingly, the new marketing campaign in print, television, and online--the first for the Web commerce giant in 18 months--has been crafted by San Francisco-based Goodby, Silverstein & Partners, which has also just nabbed the lead role in the $100 million advertising campaign by Yahoo.

A previous eBay ad campaign.

(Credit: Screenshot by The Wall Street Journal)

Goodby, owned by the Omnicom Group, is known for its innovative ideas and has done such memorable campaigns as the Slowsky turtles for Comcast, the weird folk of Emerald Nuts, owned by Diamond Foods, as well as campaigns for tech companies such as Hewlett-Packard, Adobe Systems, and Netflix.

Still, Goodby might be getting a little too cute here, because "come to think of it" could remind consumers exactly how much they have forgotten about eBay.

At best, "come to think of it" is a double-edged sword.

In a good scenario: "Come to think of it, I really haven't listened to my 'Frampton Comes Alive' album in forever and I really want to hear it again."

In a bad scenario: "An old girlfriend of mine is trying to friend me on Facebook--but, come to think of it, she was pretty freaky and I am very scared she found me again."

You get the idea! Come to think of it: play at home!

Actually, according to the Journal story, Lorrie Norrington, president of eBay's marketplace operations, is pushing a different meaning of the phrase, "to shift the buyer perception of what eBay is today."

It has to since San Jose, Calif.-based eBay has seen its core marketplace business suffer, even as it has advertised less.

Here's a video of one of the new ads.

For more videos, see the original story.

Story Copyright (c) 2009 AllThingsD. All rights reserved.

Stardust is sprinkled all over music service Spotify.

Steve Jobs built the most successful music service by dealing from a position of strength.

(Credit: CNET)

In recent months, users, reviewers, and even Facebook founder Mark Zuckerberg have heaped praise on the European service, which has yet to launch in the United States. But while Spotify may be a nifty service, it may also be a textbook example of how popularity doesn't mean profits.

CEO Daniel Ek appeared to acknowledge that his company has a long way to go before hitting profitability in a candid note he posted to the site on Thursday. Writing on the anniversary of the site's launch, Ek signaled that the service may be struggling to generate revenues by becoming the latest CEO to complain about music-licensing fees.

Ek began his post by saying he envisions a future where Spotify helps the music industry pocket $50 billion annually and lures people away from illegal file-sharing sites by the truckload. But before this happens, Ek said, the labels must help him help them.

"The new business model in music," Ek argued, "is a mix between ad-supported music, downloads, subscriptions, merchandising, and ticketing where, the user comes first...It can't happen if the industry continues to enforce the per-play fees it has tried so hard to hold on to. The new model is about figuring out how to increase the revenue per user between the different models--not squeeze as much as possible out of every single transaction."

Blaming the labels for an underperforming business model isn't new. Everybody from SpiralFrog to Imeem has claimed that overinflated licensing fees are the cause of their struggles. No doubt, the world would be a better place for consumers, if the labels gave their music away for free. The reality is that they aren't going to do that.

Label chiefs have a number in their heads that they think their songs are worth, and it's higher than Ek's valuation. All the moves of late by the record industry indicate that while they will try to help these sites, to a point, the labels appear determined to hold the line on their overall pricing strategy.

Here are some of things I've learned about the big record companies over the past year:

The labels don't think the failure of ad-supported Web sites will spell their doom. Not by a long shot. Many label honchos were skeptical of the ad-supported model from the start. The performances of these companies haven't raised the confidence level much. Ruckus and SpiralFrog are closed, Imeem barely survived a financial crisis, and no one in the sector has reported profits. In other interviews, Ek has acknowledged that less than 10 percent of the site's users actually fork over any money.

None of the services have shown that their sites appeal very much to advertisers (people listening to music don't look at ads). There's also evidence that instead of promoting song sales, ad-supported sites cannibalize them.

To hear Michael Robertson tell it, the founder of MP3.com says the top labels don't care if Spotify or the other services fail because there are always more "dummies" willing to pay big bucks to partner with the labels. One goes down, another will leap to take its place.

Here's the direction where music industry chiefs appear headed:

First, they are trying to get back control of distribution, and that means plugging the holes.

The industry knows that file sharing isn't going away, but the record companies appear to believe that they can discourage mainstream music fans from pirating music. To do that, the Recording Industry Association of America continues to lobby bandwidth providers to establish a graduated response program, which may include cutting off service to the worst offenders. The RIAA, the trade group representing the four largest music labels, hasn't been very successful so far. Not a single Internet service provider has publicly acknowledged working with the music industry on graduated response.

The next step for the labels is to focus on what works. My music industry sources say the labels, with their shrinking revenues, are backing away from risky digital models. Selling downloads is the only proven way to make money off the Web. The problem for the labels is that downloads are synonymous with iTunes, and that means they are forced to share too much control with Apple. The labels would like to see a world where lots of outlets sell songs online and the industry isn't overly dependent on a single store.

The business model that the labels really want to see succeed is subscriptions. Enticing people to pay a monthly fee to hear all-you-can-eat music wouldn't offer the same fat margins that CDs once did, but it has the potential to deliver consistent revenue and volume. So far, the public has by and large rejected paying monthly fees because they know that as soon as they stop paying, they lose their music.

As for Spotify, Ek wrote that "overnight success takes a long time," and he supported his statement by noting that iTunes "missed its revenue targets in its first year by 30 percent."

What Ek failed to mention was that in its first year--at a time when far fewer people were buying music online--iTunes sold 70 million songs and managed to turn a small profit. Apple forced the music industry to yield to its wishes by creating a wildly popular and self-sustaining business, not by pleading for mercy.

"It would obviously be wrong for me to compare Apple's success with iTunes to Spotify."

On this, Ek is right.

Google updated AdSense this week, adding desktop-style ad support for high-end smartphones like the iPhone 3GS. The change led to Google's insertion of advertisements, alongside search results, into the iPhone Maps application.

Local iPhone map searches now display sponsored listings in the view and list modes of the Maps app.

We discovered examples of these ads on Monday, while searching for a Verizon Wireless store. We should also note that this is the first time ads have appeared within one of the iPhone's default apps, rather than in something we've downloaded for free or purchased from the App Store. Our search for "Verizon" resulted in the following list view:

Maps app search--"Verizon"

Tapping the white arrow in the top blue circle brought us to the "Sponsored Link" screen, which contained some additional information about the business under its name emphasized in italics, such as phone number, Web address, and physical address. In addition, there are options to get directions to or from the business, add it to one's contacts, share it with others, or bookmark it.

Sponsored Link results page.

Nobody's surprised: Internet-advertising revenues fell slightly in the first half of 2009, according to numbers released Monday by the Interactive Advertising Bureau and PricewaterhouseCoopers.

The trade group found that online-ad revenues dropped 5.3 percent to $10.9 billion year over year, representing a total loss of $610 million. That's an understandable loss, given how much the media business has had the wind knocked out of it, thanks to the recession. But the slide in digital advertising isn't nearly as dire, when compared to the overall ad industry, which fell 15.4 percent.

The IAB also brought up numbers from Nielsen indicating that online advertising is essentially flat--and that the only sector of the ad industry that is growing is cable television.

PwC partner David Silverman called online advertising "a vibrant, sustainable industry," and he reiterated that it's an "industry that really didn't exist more than 12 years ago."

There was not much talk about social-media advertising, which has made somewhat of a breakthrough in recent months: after much criticism that it would never be able to make much money, social ads got a boost from Facebook's announcement that it had reached a cash flow-positive status several quarters earlier than expected.

The social network, which now has more than 300 million active users, has been dipping a toe into virtual-commerce revenue streams but is still supported primarily by advertising.

An adviser to the European Union has sided with Google in the company's battle with Louis Vuitton and others over alleged trademark infringement.

The search giant is fighting a lawsuit in the European courts against several companies that claim Google is infringing on their trademarks by allowing advertisers to buy keywords that match those trademarks.

Led by LVMH's Louis Vuitton, the companies are upset that makers of imitation items can buy those keywords through Google's AdWords, allowing their products to pop up in searches alongside the genuine article.

But in a statement released by the European Court of Justice on Tuesday, adviser and Advocate General Poiares Maduro said that "Google has not committed a trademark infringement by allowing advertisers to select, in AdWords, keywords corresponding to trademarks."

Maduro's opinion is that the use of trademarks is limited to the selection of keywords internal to AdWords and as such only concerns Google and its advertisers. When selecting keywords, no product or service is being sold to the public, therefore, neither Google nor its advertisers are infringing on any trademarks, said Maduro.

In response to the concern that makers of imitation products can grab certain keywords, the Advocate General put the responsibility firmly in the hands of consumers.

"The mere display of relevant sites in response to keywords is not enough to establish a risk of confusion on the part of consumers as to the origin of goods or services," said Maduro in the statement. "Internet users are aware that not only the site of the trademark owner will appear as a result of a search in Google's search engine... These users will only make an assessment as to the origin of the goods or services advertised on the basis of the content of the ad and by visiting the advertised sites."

Maduro's opinion doesn't leave Google totally in the clear. Maduro said the company might be liable if found to feature content in AdWords that infringes on a trademark. But even in this case, the trademark owner would have to cite specific instances of damage to their trademarks in order to hold Google accountable.

Trademark issues over AdWords have plagued Google for years, both in the U.S. and especially in Europe where Louis Vuitton and others have taken the company in and out of court. French justice has generally found in favor of the trademark owners, usually ordering Google to pay a fine. But the issue has never been definitively settled.

In response to the latest round of legal squabbles, the French court has asked the European Court of Justice to now settle the issue.

The Advocate General's statement is not binding on the court, but the opinion is strongly considered. The court is now reviewing the case and will render its judgment at a later date.

Updated September 18 at 10:40 a.m. PDT with Yahoo comment.

Having conquered the Web's text-based ad market, Google is setting its sights on graphical display ads--a market dominated by rival Yahoo.

The search giant on Thursday took the wraps off a revamped DoubleClick Ad Exchange, a public exchange that allows publishers to offer excess ad inventory they can't sell to advertisers looking for a bargain. Google said the exchange will meld DoubleClick's ad exchange with Google's own technology.

"Better technology can help make display advertising work better for all involved," Neal Mohan, Google's vice president of product management, said in a statement. "We're focused on growing the display advertising pie for everyone. The DoubleClick Ad Exchange is a major part of that goal."

The revamped exchange will incorporate Google's AdWords and AdSense programs, as well as feature real-time bidding and a new API (application programming interface) designed for ad networks.

Yahoo, which runs the largest online ad exchange through RightMedia, an exchange it purchased in 2007 for $680 million, said it expected the display market to have other exchanges.

"We welcome these exchanges, and look forward to working with them and integrating with them for our partners," Yahoo Marketplace chief Frank Weishaupt said in a statement. "The industry will be well served if all exchanges embrace the values we cherish, and will help promote rather than restrict the spirit of openness and the resulting transparency and liquidity of supply, demand and data in the industry."

Google's dominance of the search engine advertising market has been fueled by text ads. In 2008, it completed its $3.1 billion acquisition of DoubleClick in hopes of expanding its presence in display ads. Display ads--banners or image-based advertisements--haven't produced the same return that search text ads have to this point but are still an important part of most Web sites.

Internet display advertising accounted for $7.6 billion in 2008, roughly a third of the $23.4 billion in revenue generated by all Internet ads for the year, according to the Interactive Advertising Bureau.

NEW YORK--Broadcast network CBS will be advertising its fall TV season with a video-chip ad embedded in an issue of Entertainment Weekly.

The September 18 issue of the Time Inc.-owned magazine will feature the first video ad to appear in print, George Schweitzer, CBS marketing president, said Wednesday at a press conference at the company's headquarters here.

The ad with embedded video.

(Credit: Caroline McCarthy/CNET)

The ad will be launched in partnership with PepsiCo to promote Pepsi Max soda and the TV network's Monday prime-time lineup. Not everyone will be seeing it: the ad will appear in a magazine insert sent to subscribers in the New York and Los Angeles areas--an edition without the video chip will be sent to subscribers elsewhere and show up on newsstands.

The technology for the battery-powered ads was manufactured by a Los Angeles-based company called Americhip, and each ad can handle about 40 minutes of video.

Here are some more details about the Americhip technology: the screen, which is 2.7 millimeters thick, has a 320x240 resolution. The battery lasts for about 65 to 70 minutes, and can be recharged, believe it or not, with a mini USB cord--there's a jack on the back of it. The screen, which uses thin film transistor liquid crystal display (TFT LCD) technology, is enforced by protective polycarbonate. It's a product that has been in development at Americhip for about two years, spokesman Tim Clegg told CNET News via e-mail.

"It's leadership in innovation, which we really stress at CBS in every part of our company," Schweitzer said of the ads, which were developed with the collaboration of the Ignition Factory, a division of the Omnicom Group's OMD media agency.

PepsiCo has been experimenting with edgy, experimental ads for some time now, distributing millions of 3D glasses for its SoBe LifeWater Super Bowl ad earlier this year. It more recently launched a new Mountain Dew flavor by inviting prominent Twitter users to a party at a trendy Brooklyn venue.

Pepsi Max is the company's new diet soda geared toward men, advertised earlier this summer with bold print ads that declared, "Save the calories for bacon."

"The evolution of marketing television in the fall--it used to be as simple as this," Schweitzer said, holding up a vintage copy of TV Guide. "It was axiomatic in those days. If you took an ad in TV Guide, people watched your program. Not anymore."

Disclosure: CNET News is published by CBS Interactive, a unit of CBS.

This post was updated at 1:38 p.m. PT with more details about Americhip's technology.

In July 2008, two months before start-up SpiralFrog's aspirations were shredded by the souring economy and a series of management gaffes, the long knives were already drawn in the music service's executive suite.

In a private meeting, CEO Mel Schrieberg was stripped of most of his power after SpiralFrog's board grew tired of his heavy spending on salaries and ineffective marketing strategies. Even worse for Schrieberg, the man intent on driving him out was an old friend and one of his main allies at the company, founder Joe Mohen.

"The board wants him removed now," Mohen wrote in a July 21, 2008, e-mail exchange with Amir Khan, an executive at 3V Capital Management, SpiralFrog's biggest financial backer. "He adds no value at this time. The management will be very demoralized, if he remains."

The start-up's short, troubled history saw other clashes among managers. At the center of most of them was Mohen. He butted heads with his handpicked CEO, as well as SpiralFrog's board of directors and financial backers.

To Mohen, SpiralFrog "was all about him controlling the company, no matter who was in charge," Schrieberg, who maintained his CEO title from January 2007 to October 2008, told CNET News in a phone interview. But Mohen, who had founded the pioneering voting site Election.com, hardly deserves all the blame for what went wrong.

Schrieberg, a former IBM executive, had no operational experience in advertising or in music. In e-mails sent to several SpiralFrog employees, Mohen called some of Schrieberg's decisions "insane."

Adding to the management dysfunction was Scott Stagg, who managed 3V (now called Stagg Capital), the company that loaned SpiralFrog $34 million. For nearly two years, Stagg paid all of SpiralFrog's bills. Only sumo wrestlers are more likely to throw their weight around than Stagg, former employees have indicated, and even Mohen says management couldn't do much without first checking with Stagg.

On March 13, 2009, the music service was forced to turn over assets to creditors and shut down. To find out how a company that some called a potential iTunes killer so quickly turned into yet another dot-com flameout, CNET reviewed numerous documents and interviewed 13 people formerly associated with the company, including former board members, executives, and employees.

Certainly, SpiralFrog, which was trying to succeed with an unproven business model, wasn't exactly in an ideal position from the start. But former insiders, most of whom requested anonymity, say inexperienced managers who allowed petty squabbles to cloud their judgment didn't do themselves or their company any favors.

Could have been a contender
In December 2008, cash-strapped SpiralFrog appeared doomed. Entertainment conglomerate Viacom had expressed interest in acquiring a minority stake in the start-up three months beforehand, but the deal fell through. Yahoo would also eventually kick the tires on SpiralFrog but it also passed. Stagg, in a December 11, 2008, e-mail to SpiralFrog's board, from which he had recently resigned, sized up SpiralFrog's bleak financial situation.

"At this time, the company is out of money, all employees have been terminated, (and) over $8 million of payables remain outstanding," Stagg wrote. "There are multiple lawsuits with pending judgments, and the major music publishers, including Sony/ATV, Warner Chappell, and Harry Fox are expecting $550,000 of long overdue payments. Sony ATV is demanding a payment of $100,000 by Monday, December 15, which, if the company fails to meet, might force SpiralFrog to remove all of Sony ATV's content from the site."

Stagg may have overstated the situation a bit. Money would eventually trickle back in--virtually all of it from him--to help the company limp along while the board searched for an acquirer. There's no doubt, however, that at that time, SpiralFrog was nearing collapse.

Mohen, 53, acknowledges that mistakes were made. But, he added, what else could you expect? SpiralFrog was breaking new ground as it attempted to become the first service to offer music downloads free of charge to the public. In his version of the company story, everyone did their best and came close to turning SpiralFrog into a hit service, which attracted more than 2.5 million register users before closing.

What really killed SpiralFrog, according to Mohen and Schrieberg, 66, was the collapse of the investment-banking industry in September and the nation's subsequent financial meltdown. "There is not much you can do when funding and advertising sales go down precipitously due to economic conditions," Schrieberg said.

Until the economic meltdown, Mohen said SpiralFrog was on track. "It was all going to happen for us in October," he said. "We came a lot closer than people will ever know."

Although Mohen declined to specify how SpiralFrog's prospects might have changed in October, records show that company executives believed that a Viacom investment, which to them seemed imminent, would save the start-up.

The terms of drawn-up contracts, copies of which were obtained by CNET, called for Viacom to give SpiralFrog $100,000 in cash and $6.5 million worth of advertising on its MTV Networks unit. In exchange, Viacom would receive 4.3 million shares of preferred stock. The deal, if closed, would have valued SpiralFrog at about $120 million.

In September, at about the time the economy was becoming unglued, Viacom backed out of investment talks, and SpiralFrog's chances to survive the recession soured. One executive who did business with SpiralFrog and had seen the company's books said it's hard for him to conceive that anyone would have bought it. The source said the company's debt was just too big and complicated.

Who is in charge?
Headquartered in New York, SpiralFrog was a different kind of start-up from the get-go. It funded operations through loans. The company issued secured notes, essentially a contract whereby a company promises to repay at a certain interest rate.

After receiving $9 million in traditional equity funding in 2006, Stagg's investment firm began loaning SpiralFrog money in May 2007. Eventually, Stagg would lend the music service $34 million in convertible notes, which gave him the option of converting the loans into stock. Stagg said he never recouped the money.

So why go that riskier route, borrowing money? Most companies that can attract venture capital do. Taking out loans is less attractive because loans typically have to be repaid with interest, regardless of how the company fares.

Another way SpiralFrog differed from most start-ups was that it spent lavishly on salaries. Start-up CEOs typically ask for more equity in their companies rather than a big paycheck. It's common to see Silicon Valley managers earn less than $150,000 a year.

Not at SpiralFrog, which paid Mohen $360,000 a year in annual "consulting fees," documents show. Before he departed, former CEO Robin Kent was paid a $340,000 salary. Schrieberg's salary was $279,000.

A power struggle between Kent and Mohen paved the way for Schrieberg's appointment as CEO. In December 2006, Kent nearly drove Mohen out of SpiralFrog in a failed takeover bid. Mohen barely had enough board votes to keep control, and Kent, who had become CEO only seven months earlier, was sent packing. Just days after that, Mohen handed SpiralFrog's CEO position to Schrieberg, whom he had known for 11 years, Schrieberg said.

It was a questionable call. According to several former employees, to entice users of illegal peer-to-peer sites to SpiralFrog's legal and free music service, the company needed a CEO with a strong background in advertising and music. Schrieberg, who spent most of his career as a sales manager at companies like Xerox and IBM, had neither.

Power struggle
In early 2008, Schrieberg spearheaded a massive search engine- and affiliate-marketing campaign that would eventually cost the company $11 million, records show. The strategy was successful at drawing visitors but failed to generate lasting interest. Most people stayed a few minutes, viewed a few Web pages, and moved on. The practice of paying for traffic was supported by the board of directors and Mohen, but eventually, they lost faith in the strategy and in Schrieberg.

Perhaps not surprisingly, by the summer of 2008, it was becoming apparent that Mohen, Schrieberg, and Stagg were competing for control of the privately held SpiralFrog, former employees say. SpiralFrog was dependent on Stagg's money, which gave him considerable influence. Schrieberg had the board behind him at least until July. Mohen's personal financial troubles and feuding with fellow board members, meanwhile, sapped much of his power.

Despite his significant consulting fees and the private sale of some of his SpiralFrog shares, Mohen took out a personal loan of $115,000 in 2007 from a financial-services firm that was doing business with SpiralFrog, records show. He acknowledged to CNET News that he has not yet repaid the loan.

Schrieberg said Mohen asked him to be the guarantor of an American Express card that Mohen would use for business expenses. And since it was Stagg covering those expenses, he could deny any charge. That made Mohen beholden to Stagg as well as well as Schrieberg, who said he was never reimbursed for more than $40,000 that Mohen rung up on the credit card.

As for how he got into financial trouble, Mohen suggested that it was because of SpiralFrog's collapse. "I risked everything on the company," he said, adding that he invested $400,000 of his personal wealth, an amount he says he never recovered.

But why would Schrieberg share his card with Mohen? Schrieberg said he was just trying to help him out. Several former employees said, however, that Schrieberg went to great lengths to ingratiate himself with board members, including Mohen.

During the two years Schrieberg was CEO, the company hired the sons of board members Steve Norcia, Tom Mackell, and Bob Gordon. Schrieberg confirmed this but said the board member's sons were well-qualified.

Hiring relatives of board members can be problematic, according to corporate-governance experts. Employees can file discrimination suits, if they believe that a board member's relative was given a promotion that rightfully should have gone to them. Schrieberg said all the hires were cleared by the company's legal counsel. He also denied that such decisions made him unpopular with SpiralFrog employees. On the contrary, he said, "I was revered."

Click on the image above to see a full AOL invoice that led SpiralFrog's board to strip CEO Mel Schrieberg of most of his authority.

Nonetheless, Schrieberg lost the board's backing on July 21, when a $974,000 invoice from AOL, for affiliate-marketing services, reached the desks of Mohen and other board members. The bill was a shock; Schrieberg had told the board that the costs add up to about $600,000, according to 3V's Khan. In an e-mail exchange between Mohen and Khan, who was also a board member, Mohen lobbied for 3V to oust Schrieberg.

"(Schrieberg) needs to be kept out of the office," Mohen wrote. "When I saw the invoice today, I realized how serious this is...At this point, the majority of the board and senior-(management) team find him incompetent...Make him vice chair, and pay him for his cooperation."

Khan replied that Schrieberg was "CEO only in name. His duties are all gone to me." But Khan stopped short of agreeing to remove Schrieberg. "We can't have another CEO leave," he wrote.

Schrieberg said he resigned of his own volition in October. But he acknowledged that Mohen came to him sometime around July 21 and told him that Khan would be taking over most of the CEO duties. He said he agreed to go along with the plan because Stagg and 3V were already calling most of the shots. But Schrieberg strongly maintains that he performed well at SpiralFrog and that the board and senior management were aware of "every penny" he spent as CEO.

Starting over
In an interview, Khan and Stagg said Schrieberg was kept around because of the ongoing Viacom negotiations. Stagg said he and the rest of the board believed that removing Schrieberg would have rattled the entertainment conglomerate, which had expressed interest in obtaining a minority stake in SpiralFrog. With Stagg's blessing, Khan and some of his lieutenants at the hedge fund tried operating the start-up for several months without any official titles. In an interview, Mohen called this effort a disaster.

Click the image above to read our story on how SpiralFrog's founder, Joe Mohen, enabled a former employee to sell customers' e-mails.

"The management team to a person was alienated by Stagg's people," Mohen said. "That was because they tried to operate a business, and they didn't have the skills to do it."

In mid-September, the wheels came off. Viacom declined to invest in SpiralFrog. Stagg continued to provide some funding, but only a small percentage of what he once did. In November, Mohen gathered employees still left and told them that the company would not make payroll.

The situation was tough, but there was a brief upside for Mohen: without Stagg's money, SpiralFrog's management no longer had to placate him, former employees said. Mohen was named interim CEO and began looking for new investors. He tried convincing 3V to continue funding the company by threatening to steer SpiralFrog into bankruptcy and start all over with a new company.

Still, everyone knew that such an endeavor would be impossible, according to Stagg, because the licensing deals that SpiralFrog had with Universal Music and EMI were nontransferable. If SpiralFrog went bankrupt, Mohen would have to renegotiate for new music licenses.

Stagg made several unsuccessful attempts to take control of the board but always failed. "The truth is, we never had control (of the company) because we never had control of the board," Stagg said.

Click the image above to see copies of some of SpiralFrog's correspondence.

Proof that Stagg and 3V did control SpiralFrog could potentially cost the investor more than he's already lost over it. Antaeus Capital, a financial-services firm that began working with SpiralFrog in 2006, has asserted in a lawsuit that the start-up breached several agreements. The complaint, filed last November, alleges that SpiralFrog was really Stagg's property and that he should make good on the money the company owed. The case is still moving through the courts.

In the end, the current suit is a fight over the bones of a dead company. SpiralFrog's domain name was sold in May to MyMojo, a mobile-content site, for $20,000, sources say. After three years' worth of turf wars, more than $40 million worth of loans and investments, and a long list of unfulfilled promises, that's pretty much all that was left.