Digital Media

MySpace CEO Owen Van Natta has confirmed in a Wednesday conference call that the News Corp.-owned social network has "entered into an agreement to acquire iLike," following rumors earlier in the week.

iLike's co-founders will remain at the company and stay headquartered in Seattle; the service will be "unaffected by the acquisition" in the short term.

Van Natta explained in the conference call that the acquisition is on behalf of MySpace Inc. rather than its MySpace Music division, a joint venture with the major record labels, because the company plans to extend its technology to other areas of entertainment such as gaming and possibly film. He highlighted the "discovery" technology that iLike has built and suggested that MySpace planned to integrate it into some of its other properties.

No terms of the deal were disclosed, but reports have indicated that iLike was sold at quite a bargain--something in the neighborhood of $20 million total--because its ad-supported, streaming music model failed to rake in the profits that investors hoped it would.

Van Natta denied that the deal had been delayed due to iLike board disputes or tax issues, as some reports had suggested.

But it's unclear as to how the deal will affect iLike's relationship with Facebook. The social network's developer platform has been home to much of iLike's activity, and now that it will be owned by Facebook's closest rival, there's a chance that Facebook could restrict or block the app. Van Natta, Facebook's former chief operating officer, said that iLike's apps are part of "a lot of different social networks' experience. We're excited about just continuing to expand that experience to other areas of entertainment that MySpace has assets in."

Meanwhile, Van Natta claimed that MySpace Music is "doing extremely well" and that "we absolutely expect MySpace Music to be an important part of MySpace...for years to come." Several months ago, rumors were swirling around the music industry that its performance hadn't been up to expectations.

This post was last updated at 12:13 p.m. PT.

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."

PASADENA, Calif.-Of all the losses suffered by the music industry, one of the biggest may be the fact that nearly all of the investors that once were building digital music services have moved on.

"There are not a lot of entrepreneurs involved in this space," said David Pakman, a music industry veteran and now venture capitalist at Venrock Associates.

MySpace Music President Courtney Holt (left) listens on as venture capitalist David Pakman (center) speaks at a panel on the future of the music industry.

(Credit: Ina Fried/CNET)

By Pakman's count, there have been 109 venture-backed digital music start-ups. Fewer than five, though, produced a substantial return, he said.

"Investors lost a lot of money in this space," he said, speaking on a breakfast panel at the Fortune Brainstorm: Tech conference here. The loss for the industry, he said is that entrepreneurs have moved on to areas like Twitter and Facebook.

Those two services both have an application programming interface that allows anyone with an idea to connect to their service using generic terms. That, Pakman, said, is missing in music.

"What the music industry never encouraged or even allowed was building an ecosystem around its product," Pakman said.

For his part, MySpace Music President Courtney Holt said he thinks a big part of his opportunity is in providing new tools for music artists, building on MySpace's existing strength of helping connect musicians with their fans.

He also wants to make more of the "social music leaders" on MySpace.

"There are people at MySpace that curate music that have audiences that would rival terrestrial radio," Holt said. "I'm trying to figure out how I can give them more power."

Pakman agreed that such influencers are a key factor. "Bloggers are the music critics (of today)," Pakman said.

NEW YORK--"The music business discovered data only to show how bad it was getting," MySpace Music President Courtney Holt said in a talk on Tuesday morning. "The first time I was asked to get data when I was working at Universal (Music Group) was, 'How many songs are being stolen?'"

Holt was speaking at an event called the New Music Seminar, a day-long conference geared toward the artist side of the record business. The angle of the event was dealing with a paradox that has emerged in the past decade: the Internet has launched so many new channels for independent artists to emerge, but it's also become flooded with so many of them that it's not much easier for a band to make it big. And though Holt, who was the keynote speaker at the conference, talked more about his experiences as a music industry veteran than he did about his relatively new gig at MySpace, he did drop a few tidbits.

Most specifically, he talked about his faith in the unprecedented levels of data and statistics that the digital age can bring to the music industry.

"It's more interesting to me when an artist is being 'playlisted' than played," he said, adding that a very popular MySpace Music user can have as much reach and influence as a terrestrial radio station, and that MySpace wants to track exactly who those key influencers are. "The sharing of the music is, to me, a better way to understand virality and interest than just a passive play."

MySpace Music, a free streaming audio service, was launched by the News Corp.-owned social network just under a year ago, and Holt was installed as its chief early this year. News Corp. reportedly plans to convert MySpace into an "entertainment portal," now that Facebook has solidly eclipsed it in the social-networking game. MySpace has other issues, too: a recent management shuffle that installed former Facebook exec Owen Van Natta as CEO, significant layoffs, and reports that the music labels were dissatisfied with the performance of MySpace Music.

Interestingly, Holt was quick to characterize MySpace Music as an independent entity. "MySpace Music is a joint venture that was formed last year. We are an independent company that is still owned in part by MySpace, but we have our own staff," Holt explained at the New Music Seminar event. "Defining who we're really going to be as a business is helpful, and I think there's been a lot of confusion."

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 good news for MySpace Music is that its record label backers are pleased with the traffic the site is attracting. The bad news is that the 8-month-old service has yet to turn that big audience into big dollars.

Some of the record labels have told Courtney Holt, MySpace Music president, they are disappointed with MySpace Music's revenue.

(Credit: MySpace)

At a MySpace Music board meeting last month, the company's CEO, Courtney Holt, got an earful from several music label representatives, according to multiple music industry sources. "Several key players were unhappy" with how MySpace Music was performing, said a source with knowledge of the talks. Some board members want MySpace Music, the joint venture formed by the four largest recording companies and News Corp., to make changes such as boost sales conversions and do more to integrate the service with the regular MySpace site, the sources said.

The meeting was designed to provide "open dialogue" and "constructive feedback" from the board to the service's managers, said a source. But another source described parts of the discussions as "tense." On Wednesday morning, a MySpace Music spokeswoman declined to comment.

MySpace Music represents the largest attempt so far to wed social networking to music. Some in the recording industry argue that MySpace and Facebook are choice areas for promoting artists and songs and MySpace has long been a place where bands showcased their songs. With Apple dominating online music retail, MySpace Music is seen as a potential new opportunity to generate sales.

At the very least, MySpace Music's sluggish performance illustrates how difficult that task is. Music consumption on the Web has really come down to two horses: iTunes and illegal peer-to-peer sites.

During the meeting, Holt conceded MySpace Music needed improving, according to the sources who spoke with CNET News. Board members understand that MySpace Music was launched only last September and that Holt, a former MTV executive, was named the site's president just five months ago. He impressed some of those present by promising that he and his staff are ready to make improvements, a source said.

One source said that all the labels appear "very confident" in Holt and "nobody is panicking."

The labels have been spurring Web music services to start generating profits. The record companies say they have offered price breaks and other concessions to help start-ups build audiences but they won't offer these forever.

The labels are telling companies that they want to see results sooner rather than later.

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.

Correction: iMeem said it erred in stating some of the financial costs of its new fee structure. The corrected prices are below.

Social-networking site iMeem has always been known as an ad-supported service, which means visitors have never had to pay for anything. That appears to be changing.

For iMeem users who once uploaded hundreds or even thousands of songs, videos, and photos to the site without paying a dime, iMeem has quietly rolled out a new fee structure. And that has irked some people.

Founded in October 2004, iMeem is a social-networking site that focuses on music and enables users to upload songs to share with friends and the iMeem community. The service is perhaps best known for streaming music--free of charge--to visitors' PCs. (Streaming music is still offered for free).

What's changed is that the company has begun charging people who upload more than 100 songs and 10 videos. People who pay the $29.99 can upload up to 1,000 songs and 100 videos a year, according to an iMeem spokeswoman. Those who pay $100, can upload a maximum of 20,000 songs and 500 videos.

All of the packages still allow for unlimited number of photos.

The new price increases have dismayed some fans of iMeem.

"Some of the people I invited to iMeem (because I told them: 'Hey, it's so much better than YouTube') are thinking about leaving iMeem now," according to one person who posted on iMeem's message board. "I don't (know) what to say. I used to invite everybody to iMeem because it was so much better than YouTube... I don't know if I should keep saying: '(iMeem) is better than YouTube.'"

Gina Olsen, an iMeem spokeswoman, said that the company is always looking to generate revenue while at the same time improving the site for visitors. "We will continue to experiment with new monetization opportunities if they add to the user experience," she said. "Other examples of this include links to MP3 downloads, ringtones, and e-commerce on iMeem."

That's PR speak and the translation is that the company needs to start making money. Privately held iMeem is one of those tech companies that began with some intriguing features (free streaming music) but has seen competitors match its better services.

MySpace Music, the joint venture formed by all four of the largest music labels and News Corp., has begun offering streaming music to its much larger audience. In addition, MySpace Music offers downloads, via Amazon.com.

In a down economy, look for iMeem and similar smaller digital music services to ask more from users than in the past. Internet radio station Pandora has recently begun inserting audio ads into streaming music. Even the mighty iTunes, with its 70 percent market share of the download market, has announced a price hike on hit songs. (Prices on catalog music have actually come down.)

One thing should be noted: iMeem's new pricing structure was not required by the big music labels. According to two of my music sources, iMeem's deal with the top recording companies is unchanged and there are no special requirements for uploads. This is iMeem's decision.