Digital Media

Multiple sources are reporting that MySpace is in talks to acquire Imeem, the social-networking music service that has struggled with financial problems for some time.

(Credit: Imeem)

Peter Kafka at All Things Digital is reporting that negotiations are in the late stages and that MySpace is making the deal to acquire some of Imeem's talent and technology. News of the talks was first reported by TechCrunch.

Here's my contribution to the news: two sources with knowledge of Imeem say CEO Dalton Caldwell was in New York recently looking for new investors. Imeem was again running short of cash after coming perilously close to a financial crisis last spring. After Imeem received new funding from some of the music labels, sources told CNET that the money would last only through the end of 2009.

An Imeem representative was unavailable for comment, and a MySpace representative declined to comment.

Nobody has reported the asking price but don't expect it to be very much. One of my sources said that Imeem had been looking for a buyer for a while. Nothing had come of it. But Imeem, which made a name for itself by being among the first to offer ad-supported streaming music and being free to users, is likely to be thrilled by this kind of exit.

A sale is another sign that the ad-supported sector is amid a shakeout.

The truth is the sector is in shambles. Ruckus and SpiralFrog shut down earlier this year. Qtrax, a proposed legal peer-to-peer service hasn't even formally launched yet and has struggled with financial problems.

MySpace purchased iLike in August for a price that was reported to be barely enough for investors to break even.

For a breakdown of the challenges that ad-supported music services face, read "How turf wars and miscues crippled SpiralFrog" and "Plenty of proof that ads don't support Web music."

Update at 9:05 a.m. PST: MySpace representative's statement added.

How far we've come in such a short time. When I began this blog in 2007, finding a particular song online was an exercise in frustration. You could subscribe to an all-you-can-eat service like Rhapsody, but cheapskates and occasional music listeners either had to dig deep, engage with a questionably legal file-trading service, or settle for 30-second previews from iTunes or one of its Web-based competitors.

Search results for "U2 Beautiful Day" earlier today. The box at the upper-right is an embedded version of the Lala player, which let me play the complete song multiple times.

Since then, as readers of this blog know, dozens of sites offering free streaming music have emerged, from the dead-simple like Songerize and its successor Songite (enter a song title to play it now) to the fiendishly complicated Imeem (whose original user interface gave me a headache, although it's since gotten much better).

But, let's face it, most people don't read this blog. Again and again, nontechnical music fans are blown away when I show them a site like Grooveshark, which lets you play any song, any time, and even arrange songs in queues and playlists. "Is that legal?" they often ask. (Answer: it depends.)

Today, that all changes. Google announced the integration of playable songs into its search results yesterday, and is slowly rolling the feature out to U.S. searchers. I finally saw the feature in action this afternoon, when I ran a search on "U2 Beautiful Day." (You can test it here.)

To an experienced online music listener, the feature seems a little bit random because Google is using both iLike (recently acquired by MySpace) and Lala to power playable results, and the two offer different experiences. For my first search, Google randomly chose iLike as the default player, and iLike only let me play the song once, then relegated me to a 30-second sample. When I cleared my cookies and tried again, Google made Lala my default player, and I was able to play the full song as many times as I liked. (The experience will also vary by song and artist, depending on what the copyright holders dictate--Led Zeppelin, for example, is available only in 30-second samples on iLike, and most of its songs are completely missing from Lala.)

Some searches also give you links to Imeem, Rhapsody, and Pandora, each of which offers yet another experience--Rhapsody lets you play up to 25 songs per month for free, Imeem is best for finding unusual versions of popular songs (like live takes), and Pandora requires you to create a virtual radio station based on a particular artist or song, which can be useful for discovering other music you might like, but doesn't give you an instant fix.

Whatever. For the average Internet user, this distinction doesn't matter. What matters: when users go to Google to search for an artist's name, song name, album name, or even a snippet of lyrics, they won't just get random text links or YouTube videos. Instead, the first set of links will be to the audio recording itself--in many cases, the entire song. Everybody knows that there's free music available on the Internet, but most casual listeners don't bother to find it. Now, the most-visited site on the Internet will put it right in front of their faces. As awareness spreads, it'll be another nail in the coffin of traditional music media--why listen to the radio?--and a boon for the five companies who signed this deal with Google. Artists and record labels might also get a shot in the arm, as users discover new music for free and perhaps eventually buy a copy to keep.

As for the rest of the online music start-ups out there? They better be on the phone right now, looking for a benefactor.

Facebook most's popular music application comes from iLike, and soon the company will try to turn that social-networking cachet into song sales.

Seattle-based iLike, a social music service, is expected to launch a music download store in coming days, perhaps as soon as Thursday, according to two sources with knowledge of the deal. Last month, CNET News reported that iLike was in talks with the top four recording companies about securing licenses for downloads.

The new store will debut as a beta version and will feature songs from at least three of the four top major recording companies, according to the sources. On Tuesday, iLike changed the name of its Facebook app to "Music."

iLike CEO Ali Partovi was not immediately available to comment.

This is a strange time for ad-supported music services, and iLike's foray into downloads comes as skepticism about the business model is higher than ever. Earlier this year, Ruckus shut its doors and Imeem, which is also testing a download store, faced a financial crisis before securing a round of funding and better licensing terms from the big recording companies.

A CNET examination of SpiralFrog, the first ad-supported download site, which went out of business in March, indicates that advertisers just aren't willing to pay these sites premium rates. Music listeners, as it turns out, don't want to stare at ads when they're listening to songs.

As the ad-supported music sites cast about for ways to generate revenue, some of them are turning to selling downloads. This means they hope they can entice iTunes users, which represents the vast majority of the digital music market, away from Apple.

Others have tried this tact, including Microsoft, MTV, and Wal-Mart and all have ended up either scurrying away or scratching out a living by servicing a niche market. By all appearances, Apple continues to be an unstoppable force in music.

Nonetheless, Partovi impresses me as someone who's not afraid of a fight. Last week, I interviewed him via e-mail and while we didn't agree on many of the questions surrounding the ad-supported model, there's no doubt in my mind he thinks he has it figured out.

Partovi on downloads: "Everybody in our business is talking to the major labels almost continuously (about downloads), and for good reason. The licensing landscape has evolved a lot, and it continues to evolve. If and when a deal is available that can offer an even better experience to our users at reasonable costs to us, we'll always be interested. I can't discuss any specific negotiations, product ideas, or rumors."

Partovi on the ad-supported model: "I think the jury is out as to whether ad-supported music consumption will work. However, I think it's important to remember that there's much more to music. At iLike, we've built a self-sustaining ad-supported business (positive cash flow over the past 8-month period), and that's with only one full-time ad sales person."

"What's our secret? It's simple: we're not trying to help consumers get unlimited music without paying for it. Instead, we're focused on music discovery: we deliver all the other things that music consumers love without risking a lawsuit or paying high royalties. Besides sampling music, people use iLike to get concert notifications, recommend new bands to friends, see video messages or tweets from their favorite artists--all of which has built iLike an audience of more than 120 million uniques per month across all our apps and widgets while maintaining very low costs."

Updated at 10 p.m. to correct spelling of iLike CEO Ali Partovi's name.

Three years ago this month, the Financial Times and The New York Times chronicled the emergence of an untried but promising new digital-music service: SpiralFrog.

Some of the hurdles that contributed to SpiralFrog's spiral out of the sector are the same confronting former rivals.

The start-up would offer music free of charge to consumers and attempt to hand the bill to advertisers. Since then, we've seen a dozen companies make names for themselves by offering their own twist on the ad-supported music model, including MySpace Music, Imeem, and Pandora. But regardless of how anyone has tweaked it, not a single service in the still-nascent sector has proven that it knows how to offer consumers a compelling free-music service while providing advertisers an effective way to deliver their messages.

Music fans generally refuse to pay to listen online and resent on-site advertising. The hard truth is that to this point, ad-supported music as a standalone business has failed.

Ruckus and SpiralFrog have closed their doors. Imeem faced a financial crisis earlier this year, until receiving new funding from investors and price concessions from the music labels. A year after Qtrax obtained licenses from all four of the top recording companies, the company appears to be struggling to pay its bills and has yet to launch.

In May, CNET News reported that MySpace Music's performance has underperformed. Several music sites have overhauled their business models (Lala) or are trying to do so (iLike).

Pandora's popular iPhone app, meanwhile, has helped spur user growth, but the company has also opted out of ad-supported music for the site's heaviest users. The company said last month that those tuning in for more than 40 hours a month must pay 99 cents to continue listening.

And if you're waiting for the Swedes, in the form of white-hot music service Spotify, to come charging over the hill to show us how to make the model work, you needn't bother. Three industry sources told CNET News last week that the service--expected to debut in the United States next year--is struggling to convert users into paying customers. Just like others on this side of the Atlantic, Spotify hasn't figured out how to make money.

CNET News has recently completed a two-month examination of SpiralFrog, the now-defunct download service that was among the pioneers of the ad-supported model. The review provides an unprecedented view of the many challenges facing companies in this sector. SpiralFrog's tale sheds light on the kind of rates advertisers are willing to pay and the licensing fees the top music labels charge. None of it is very promising.

There's no doubt now that the much-hyped SpiralFrog was never among the front-runners. The service offered music from only two of the four top recording companies. Users couldn't download SpiralFrog's tunes to their iPods. And documents show that the start-up spent millions of dollars on marketing but never attracted a loyal following of significant size.

There may be a temptation to dismiss SpiralFrog's problems as unique to the company. That would be a mistake. There's no question that some of the same factors that stymied SpiralFrog are bearing down on many of the company's former rivals. "This version of ad-supported model is certainly on life support," said Mike McGuire, an analyst at research firm Gartner. "I think we can say this round didn't quite work."

Migration to downloads
One sign that some players in digital music are losing faith in the ad-supported model is the rise in companies looking to sell downloads, according to one music industry executive. "That's become the fallback position," the source said.

A copy of a $1.8 million bounced check written by Qtrax to Oracle, which filed a breach of contract and copyright lawsuit last month against the yet-to-be-launched music service.

(Credit: Screenshot by Greg Sandoval/CNET)

All four of the major music labels declined to comment for this story.

Imeem, which has mostly focused on streaming ad-supported music to users' PCs, has recently begun testing a download store. Music industry sources told CNET News last month that iLike, which powers Facebook's most popular music service, was in talks with the major record companies over licensing downloads.

For two years, Imeem has posted links to Apple's iTunes and Amazon.com's MP3 service on its site to enable visitors a means to buy songs. MySpace Music, YouTube, Pandora, and Spotify do the same. But Imeem is testing how effectively it can sell a limited number of tracks from Warner Music Group and several independent labels directly to consumers.

Selling downloads directly, rather than linking to another retailer, is more lucrative. A music site that sells downloads can make 30 cents from direct sales rather than the 5 cents that the so-called affiliate partners pay, according to an industry source. The trick for any upstart download store is to convince customers of Apple's iTunes and Amazon's MP3 service--by far the leading download stores--to try a new outlet.

Nonetheless, the behemoth record labels are willing to work to help ad-supported sites survive. Imeem is the poster child for how the labels have changed their approach to these services. Founded in 2004, Imeem came very close to running out of money until it found new funding and also negotiated better licensing deals with the labels earlier this year. Some of Imeem's rivals asked and received similar concessions, industry sources said.

That hasn't stopped the complaining, however. The people who run digital-music stores continue to quietly argue that licensing fees charged by big record companies are still too high for stores to eke out a profit. Music industry insiders say it's not their fault that the start-ups have failed to win over advertisers. What are they supposed to do--give their content away? That won't happen, executives say.

Overpaying for music
CNET News' review of SpiralFrog showed that in 2006, SpiralFrog agreed to pay $3.2 million to Universal Music Group, the largest of the top four recording companies, in up-front fees. Documents indicate that in 2008, SpiralFrog set aside $3.5 million to license music from EMI, the smallest of the major labels. That deal triggered a "most favored nation" clause in Universal's contract, and SpiralFrog ended up paying an additional $1 million to Universal.

From a SpiralFrog June 2008 expenditure list. Note: SpiralFrog had no licenses with Warner or Sony. Figures represent amounts the start-up expected labels to charge.

Although SpiralFrog managers never secured deals with Sony Music Entertainment or Warner Music Group, the music service budgeted $5 million and $3.3 million, respectively, to acquire licenses from those services, records show. Those figures were all minimums. Under the agreements reached with Universal and EMI, had SpiralFrog made revenue above those minimums, the company would have been required to split that revenue 50-50 with the labels.

By the time SpiralFrog compensated the labels and music publishers, the company's managers figured that 66 percent of their revenue went to the music industry, records show. SpiralFrog's deal with the major labels was different from those negotiated by most music-streaming Web services, which pay penny-per-play rates. Their agreements are to pay a cent, or some fraction of a cent, each time a song is played.

It appears that it made little difference whether the record companies got their money before or after a sale. The rates they charged forced ad-supported companies to generate big ad revenue in order to cover costs.

SpiralFrog, for its part, never came close to covering costs, documents show. The start-up lost more than $26 million in 2008.

Advertisers are simply unwilling to pay the music sites a premium rate. In order to charge advertisers $10 for 1,000 impressions, ad-supported sites must operate their own sales teams, which is expensive. In SpiralFrog's case, the company's salespeople were successful at signing a few marquee advertisers, including McDonald's and Microsoft, but much too often, the company found itself selling excess ad inventory through remnant ad networks, which typically pay 50 cents or less for 1,000 impressions.

Advertisers aren't willing to give the ad-supported sites top dollar because they know that people aren't necessarily staring at a computer while listening to songs online. Instead, they tend to check e-mail or Facebook, do homework, eat dinner, or browse the Web in other browser tabs. In contrast with radio, Web listeners have become accustomed to music without audible ads embedded into the streams--and they don't want those ads, according to Gartner's McGuire.

Another gripe that advertisers have is that many ad-supported sites don't reach big enough audiences. Mel Schrieberg, SpiralFrog's former CEO, said SpiralFrog couldn't get in the "tier 1" advertising door with fewer than 5 million users. To generate this kind of traffic, SpiralFrog spent $11 million in 2008 on search engine and affiliate marketing, which gobbled up the little revenue the company was able to generate.

But Susan Kevorkian, a digital-music and mobile-entertainment analyst at IDC, points out that a large audience doesn't mean instant success. Although MySpace Music has access to the social network's shrinking but still large audience, she said the service still "hasn't performed to industry expectations."

Is there any hope?
One bright spot is that some investors are sticking with the sector.

In addition to Imeem, Spotify and Pandora found new funding. Investors including British venture capital firm Wellington Partners were part of a $50 million round of financing for Spotify, according to the Financial Times. And Pandora last month announced that it had raised $35 million of additional funding.

Ali Partovi, iLike's CEO, argues that the ad-supported model works for music, but not when you're giving songs away.

"We've built a self-sustaining ad-supported business--positive cash flow over the past eight-month period," Partovi said. "That's with only one full-time ad salesperson. What's our secret? It's simple: we're not trying to help consumers get unlimited music without paying for it. Instead, we're focused on music discovery. We deliver all the other things that music consumers love without risking a lawsuit or paying high royalties."

That may be true, but iLike is among the companies discussing downloads with the music labels.

Click the image above to read the lead story of our series on SpiralFrog. Stories on SpiralFrog's internal strife and customers' private information will appear Tuesday.

Matt Graves, Imeem's spokesman, said his company is trying to be innovative and not solely rely on traditional online advertising, such as on banners and display ads. The company is trying to mix things up with in-stream audio ads and custom-tailored campaigns. The music service recently promoted a download giveaway from Wal-Mart Stores and offered users a chance to remix songs from artists such as rapper Flo Rida.

"If it's all about displays, then users will get ad-blind," Graves said. "We're enabling advertisers to do a deep integration."

IDC's Kevorkian agrees that until now, ad-supported music has failed, but she sees some possibilities.

"This model has some flaws that need to be addressed before it works as a standalone model," Kevorkian said. "That said, there's a possibility that it could be deployed in conjunction with a hybrid paid model to help generate revenue so that the music provider isn't solely dependent on ads."

Weeks after writing off its Imeem investment, Warner Music Group has once again thrown in with the video- and music-focused social network, a source confirmed on Monday.

Only this time, Warner doesn't have to dip into its wallet to acquire an even larger interest in the start-up, according to a story by Peter Kafka at All Things Digital, who broke the news.

What the third largest recording company has agreed to give up for the stake is to rip up the old licensing contract and create a new one that asks for less money each quarter, according to Kafka. My source, who is familiar with the deal, confirmed this.

Warner didn't appear happy last month about having to write down $33 million, most of it from investments made in music site Lala and Imeem.

Warner Music's writedown--$16 million in Imeem and about $11 million in Lala--is a reflection of the company's valuations during the economic downturn, said Edgar Bronfman Jr., Warner Music's CEO at the time.

The top four music labels--Universal Music Group, Sony Music Entertainment, Warner, and EMI--have all been relaxing the financial terms they require from start-ups.

Too bad SpiralFrog and Ruckus couldn't have held out a few more months, perhaps the music services that went bust earlier this year might have negotiated better terms.

Investments made in Web music services Lala, Imeem, and MySpace Music haven't paid off for Warner Music Group, at least not yet.

The third largest of the four biggest recording companies said Thursday it would write down $33 million, most of it from investments made in Lala and Imeem. Edgar Bronfman Jr., Warner Music's CEO, also said after the company issued quarterly earnings report that MySpace Music's performance has so far "disappointed."

Warner Music's write down--$16 million in Imeem and about $11 million in Lala--is a reflection of the company's valuations during the economic downturn, Bronfman said.

Ad supported music services are being hit hard by the ailing economy and the hobbled online ad market. As ad revenues disappear, these companies are trying to charge for some of services, but they haven't gained much traction yet. No one in the sector, not even YouTube, has reported profits. Apple, which sells downloads and doesn't rely on advertising, continues to be the only significant music service making money from the sale of music downloads.

The big question is whether Warner Music's recent moves--the write down, the label's acrimonious departure from YouTube, and decision not to invest more money in Imem--is a reflection of a larger pullback from the tech sector by the music industry.

Imeem, a social-networking site, was teetering on collapse recently, but sources told CNET News that it had received new investment that will keep the site operating for much of the year.

Lala has gone through several business models, but the latest iteration has encouraged some of the music labels with the amount of revenue it has reported generating, music industry sources said several months ago.

MySpace Music is the joint venture founded by News Corp., and the music labels. On Wednesday, CNET reported that some of the labels were dissatisfied with the revenue generated by the 8-month-old music service.

In a conference call with reporters to discuss Warner Music's financial performance, Bronfman said of MySpace: "We continue to hold out a good deal of hope...but, you know, without putting too fine a point on it, (MySpace Music) has disappointed us so far.

"We feel MySpace Music has been slow to create monetization tools," he said, "and to be able to impact in a revenue-generating way, the massive audience that they have been able to attract."

Peter Kafka at All Things Digital was first to report Warner Music's write-down.

Imeem, a social-networking site geared for music fans, has obtained new funding that in all likelihood saved the company from closing, according to music industry sources.

The money received so far by Imeem, which streams ad-supported music to users' PCs, is unlikely to last the company through the end of the year but the start-up's financing efforts continue, said the sources.

In March, TechCrunch reported that Imeem was in financial trouble after managers failed to sell the company or raise more money. At that time, the company denied that a shutdown was imminent. The company went back to some of its investors, which included some of the major music labels and asked for help, which it received. But last month Imeem went back to investors and told them even with the added assistance, Imeem needed new funding to survive, according to two industry sources.

An Imeem spokesman declined to comment.

Imeem made it clear that if it didn't raise money soon, the situation was "dire," one source said.

This first quarter of 2009 has been particularly bitter for ad-supported music sites. SpiralFrog, a site that offered ad-supported downloads closed its doors in March. In January, Ruckus, the music site tailored for college students, shuttered operations.

Some of Imeem's remaining competitors are facing their own struggles, including MySpace Music, the joint venture from News Corp. and the major labels. Music industry sources say the big recording companies are dissatisfied with the ability of the 8-month-old service to generate revenue. Read more about that here.

The Jonas Brothers totally want to add Mark Zuckerberg as a friend now.

The Jonas Brothers, that family of mop-topped teen pop-rockers who seem to be just about everywhere these days, are going to be debuting their new single on Facebook this Thursday.

They'll be performing the new song, "Paranoid," in the first of four Webcasts created with a Ustream app for the Facebook platform. Fans can access it by navigating to the band's Facebook fan page. The Jonas Brothers, who also were poster boys for the debut of the MySpace Music service, also will answer questions from fans and talk about their upcoming tour. That's at 5 p.m. PDT on Thursday; they'll host three more Webcasts on May 14, 21, and 28.

Over a million people have signed up as Jonas Brothers "fans" on the band's official Facebook page, but considering Facebook has over 200 million active users, that's a fairly small number. This promotional effort will undoubtedly shine a brighter spotlight on Facebook fan pages, which the social network has been hyping up a lot with a fresh redesign and prominent placement in the "streams" of members' home pages.

There is, however, a more significant impact to this announcement than just the synergy of one of this decade's biggest music sensations (I guess they're kind of like this generation's Hanson, right?) and one of its biggest tech sensations. "This marks the first time a U.S. musical artist is debuting a new song via a live Webcast series on their Facebook Page," a statement from Facebook read.

Yet song debuts are nothing new to the social-networking world: Debuting the stream of a new single or album on a social music site like MySpace Music, iLike, Imeem, and Last.fm (owned by CNET News publisher CBS Interactive) has become a regular promotional stop for artists looking to spread the buzz about new releases. Many of these services have a heavy presence on Facebook's third-party application platform, and Facebook even partnered with one of the most popular, iLike, to debut a Thievery Corporation album last year.

There have been rumors over and over again that Facebook was looking to start a music service of its own, or maybe to acquire one of the popular music apps on its platform. That hasn't come to fruition. But does this new move mean Facebook is starting to compete directly with some of the music applications that have made its platform so popular? Maybe.

We'll see when those totally dreamy Jonas Brothers show up there on Thursday.

Free, on-demand streaming music is a rising tide: since the start of 2009, I've covered relatively new services like Spotify and Just Hear It, and there are plenty of established players like MySpace Music, Imeem, and Grooveshark.

Listen to Michael Jackson's music on Michael Jackson's official Web site. What a novel idea!

(Credit: Sony Music, Michael Jackson)

Instead of trying to stop the tide, Sony Music has wisely embraced it: starting today, the company will introduce streaming music players on the Web sites of its most popular artists, including popsters like Kelly Clarkson, John Legend, and Jacko himself. It makes perfect business sense: instead of letting some third party like Imeem sell advertisements against high-demand music, Sony can sell or display its own ads.

Of course, they couldn't make it too easy--finding the audio on Michael Jackson's site took a few clicks, including one that forced me to identify my country, and the songs were embedded in the Sony-specific MyPlay player, which is an interesting piece of technology but only lets you create playlists with songs from other artists with MyPlay players. More generally, I wonder if it's too late for these label-specific initiatives--I'm sure plenty of hardcore Britney fans have her Web site bookmarked, but most music listeners probably prefer to use services that let you compile lists from multiple artists on multiple labels.

Sony is also adding lyrics to these artists' sites, provided by the company's own Gracenote subsidiary. Excellent move. I can't believe it's taken this long, given the lack of decent lyrics sites out there. In fact, I still don't understand the reluctance to publish lyrics online--what are people going to steal? What money is the artist or copyright owner losing? Kudos for Sony for taking a baby step toward ending this silliness.