September 11, 2007 4:00 AM PDT

Is free music too expensive for SpiralFrog?

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When SpiralFrog announced plans to provide free, ad-supported music, the approach wasn't new. But unlike companies with similar business models, SpiralFrog had some muscle behind it: Universal Music Group, the largest music label, had signed on. To some pundits, this was enough to qualify the company as the latest "iTunes killer."

But after that big August splash last year, SpiralFrog was quiet. There were no announcements with the other major labels: Sony BMG, Warner Music Group and EMI. SpiralFrog may have run into a perception problem: Many in the business were leery about putting their songs next to the word "free," according to one music executive, who spoke on the condition of anonymity.

The thinking went something like this: The Internet was already responsible for undercutting the value of music. Why contribute any more to the idea that songs don't have financial value? Some decision makers at the labels were also skeptical of SpiralFrog's service. A song took as long as 90 seconds to download, which left ample time to present ads to users, but also enough time to irritate them.

Instead of launching the site in December as promised, SpiralFrog's management team, which included Kent, Chief Financial Officer Tom Patrylak, Chief Strategy Officer Bob Goodale, and Lance Ford, director of sales and marketing, left the company following a split with Mohen. They were followed by nearly half the members of SpiralFrog's board. Mohen replaced Kent and the departed board members and in recent months has launched test versions of SpiralFrog's Web sites in Canada and the United States.

Does SpiralFrog have enough gas?
Once SpiralFrog launches, which is expected to happen in the next several weeks, it will be competing with a library consisting of about 770,000 songs. By comparison, Apple offers more than 6 million songs on iTunes.

The other concern is whether the company has the resources to pay for additional licenses. SpiralFrog this year sold $10 million in secured notes, according to the SEC documents. The notes are essentially loans, and next month the company must begin paying down the annual 12 percent interest on those notes. This means that in addition to the licensing fees it must pay, SpiralFrog is also going to be paying off debt.

SpiralFrog said in the 10SB filed with the SEC that its independent accountant "expressed substantial doubt about our ability to continue as a going concern." But Mohen downplayed financial worries. The item by the accountant is required for any company that hasn't generated profits in a year, he said, adding that any profitless start-up would receive the same boilerplate paragraph.

"What is changing is that SpiralFrog is now launching its Web site across the United States and Canada," Mohen said. "We have customers, we have revenues and we're about to have users. We are confident from our cash flow from operations and other steps we've taken that we will be successful."

SpiralFrog's troubles haven't shaken the faith of those who support the ad-supported business model. Ruckus Network, a free music service that has managed to sign all four major labels, offers more than 3 million songs and has operated for more than a year.

The difference between SpiralFrog and Ruckus is that the latter company targets college students. Herndon, Va.,-based Ruckus has deals to offer ad-supported music at more than 170 schools. Mike Bebel, president and CEO of privately held Ruckus, declined to discuss SpiralFrog specifically but did say that the trick to making money in the ad-supported business was offering a large music library.

"That means our users spend a lot of time on our service diving into our catalog," Bebel said. "Spending more time on the site means more ad impressions and that's what advertisers like to see."

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4 comments

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Downward Spiral
The idea seems like a bad one. But if it does have a chance, they
certainly are blowing it with their site. They've been working on it
for how long now? Yet there isn't even a way for a user to discover
what the service is without signing up first. I mean, really, if you
want to attract users for your service, putting some information for
them up on your site might be a good place to start. Bad idea +
bad execution = Spiral Frog won't be around for long.
Posted by jd29 (14 comments )
Reply Link Flag
These investors
Are idiots. There are a lot of interesting startups run by honest people who wouldn't even think of paying themselves anywhere close to $400K+ while their company careened towards death. Some of those would lost your investment money to, but they'd at least try to get their biz going; others would actually do well and give you good returns. Whomever gave money to this thing (four years: no website!?) deserves to lose all of it.
Posted by michaelo1966 (159 comments )
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deja vu
wow they have the business plan from the 2000 boom.

Me: What's you business plan?

Them: I sell dollars for 75 cents!

Me: How do you make money on this?

Them: I make it up in volume!
Posted by echeola (12 comments )
Reply Link Flag
COOKIES
useless POS website seems to want to install cookies - so let it, Cnet's ccokies seem to work. Why not theirs? Obviously not paying enough in consulting fees. Where is Anderson consulting when you need them?
Posted by gggg sssss (2285 comments )
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