Digital Media

LOS ANGELES--Already the far-and-away leader in search, Google wants to be a big player in music discovery, too.

The pop-up MySpace player that will appear when clicking the 'play' button in a Google search.

(Credit: MySpace)

The search giant teamed up with News Corp.'s MySpace and streaming service Lala for the Wednesday debut of the new Google music search feature at the historic Capitol Records building in Hollywood. With the new music search, which had been internally code-named "OneBox" when news of the project broke earlier this month, search queries pertaining to something like a song, artist, lyrics, or album will bring up links to streaming songs from iLike and MySpace, as well as links to artist information on Pandora, Imeem, and Rhapsody. The lyrics search is provided through a partnership with Gracenote.

"It is directly embedded and integrated into Google search. There's no special button to push," R.J. Pittman, director of product management for search properties, said in a phone interview with CNET News. Currently, due to licensing and availability issues, the music search is U.S.-only.

There also won't be direct download links in Google: those will be handled through Lala and MySpace. "We push all the music engagement and commerce down through the partners," Pittman said.

Additionally, if a relevant music video is available, the MySpace window that pops up when someone clicks on the "play" button in search results will display a link to that video through MySpace's new music video portal. That's interesting, considering music videos are some of the most popular content on Google's own YouTube--but YouTube video results will continue to show up independently of the new music results in Google searches.

Financial terms of the partnerships aren't yet clear. "Everyone's keeping their own revenues and we're not messing with anything," Lala founder and Chairman Bill Nguyen told CNET News. But MySpace Music President Courtney Holt was a bit more tight-lipped, saying "we're not discussing the financial details."

The MySpace deal is a little more complicated to begin with, though. Google had been in talks with music start-up iLike about integration into music search, but then iLike was acquired by MySpace in a deal that closed earlier this month. Indeed, a statement from Holt says that "this relationship was secured and implemented by the iLike team." But iLike founder Ali Partovi (who's currently on board MySpace's music team) explained that the partnership now has "MySpace branding, (and) MySpace content licensing." Through the integration of iLike's technology, it'll also have concert notifications if someone searches on Google for a band that's currently on tour.

"I think MySpace, along with (Apple's) iPod, is one of the most trusted brands in music, one of the most resonant to consumers," Partovi said. MySpace is also reported to be in talks with Microsoft to power a music feature on MSN.

Music search is something that Google could really dominate. According to traffic firm Experian Hitwise, 6 percent of Google's top 1,000 search-related terms deal with music, and already 30 percent of traffic to sites that Hitwise classifies under the "music" umbrella comes from Google.

Considering Google's reach, it's a big win for both MySpace, currently struggling to redefine itself as a pop culture powerhouse rather than a social network through its MySpace Music service, a joint venture with major and independent record labels, and Lala, which also has a new song-gifting deal with Facebook. "We think (Google's music search) going to have a thousand percent increase in our sales, an order of magnitude more," Lala's Nguyen told CNET News.

This also means that music-related search results are getting a sheen of legitimacy on Google. With official partnerships, Google's most prominent music search results will be from sites that have licensing deals in place with the major labels, rather than potentially pirated content. Google's history with the music industry is spotty at best: it's had to strike its own deals with the major record labels, and relations haven't always been positive. Music search puts it all into order, partners in the deal say.

"Instead of ending up with a pirate site and a page with a bunch of ads or random lyrics sites, you wind up with a play button," Nguyen said.

Updated 4:30 p.m. Just after Google and Lala made the announcement official (in what was probably not a coincidence) Yahoo released a blog post designed to point out that they've been offering this kind of music search for a while. "We've made it easier to find music videos, artist information, and play full length songs from within the search results page. This is just one of the many ways Yahoo! is enhancing the search experience for music lovers," said Larry Cornett, vice president of consumer products for Yahoo Search.

Microsoft's MSN is in preliminary talks with MySpace about using the social-networking site's music service, MySpace Music, to help power music offerings on the giant portal.

While sources at both companies cautioned that the talks are still early, Microsoft, which has its own music site that it programs with original and partnered content, execs are interested in goosing it.

That's because MSN Music consistently ranks substantially lower than other big online music properties in terms of traffic, while MySpace Music is always near the top.

Sources said Microsoft execs don't think they can do as good a job as MySpace is doing and don't see the point in striking needed but complex deals with music labels, which the News Corp. property already has.

In an April report by comScore, for example, MySpace Music was No. 2, just behind AOL Music, with 27.4 million unique monthly visitors. MSN Music was No. 6 with just 7.4 million.

Nonetheless, music is an area MSN cannot lag so badly in, given that entertainment is one of the key categories it is focusing on as it preps for a major renovation of the portal.

As BoomTown wrote in mid-July about a wide variety of changes coming to MSN:

MSN, Microsoft's online portal, is also preparing a major redo of what U.S. and, possibly, international consumers will see, as it doubles down on five key content verticals, while cutting back on others.

In a new focus that will start to be apparent in the next month, MSN will heavily add to its News, Sports, Finance, Lifestyle and Entertainment offerings, weaving more data from [its search service] Bing into the mix.

"It's a decision to make it so MSN does less better," said one source close to the situation. "So there will be a focus of attention on a smaller number of categories in which we can be either #1 or #2 in, rather than #4 or #5."

It is not clear exactly what the financial terms would be in any tie-up between MSN and MySpace, which could include licensing of content and other services related to music.

But such a deal is not unusual--MSN's sports site is powered by Fox Sports, which is another News Corp. property.

And such a partnership would also key into concepts that MySpace CEO Owen Van Natta outlined in a recent interview onstage at the Web 2.0 conference.

Key among them was boosting music and entertainment overall and making them the prime focus in the site's efforts at reinvigorating itself, as well as expanding distribution of MySpace.

In fact, MySpace recently bought social music service iLike to expand its distribution all over the Web, for example--including on Facebook, the longtime social-networking rival from which MySpace is now trying mightily to differentiate itself.

In his appearance, Van Natta also unveiled a music video hub, the ability by users to buy music using Apple iTunes, and a set of better analytical tools--called MySpace Music Artist Dashboard--to help artists figure out how to best work with fans.

But MySpace needs more than these, and a link with Microsoft would provide it with a traffic gusher, since MSN's main page remains one of the most trafficked sites on the Web.

If such a distribution partnership were struck, it would also raise the question of what will happen regarding MySpace's negotiations with Google over renewal of their search deal, which expires next summer.

Dissatisfaction over the pricey three-year deal has been expressed by both sides; their mutual grumbling is one of the biggest open secrets in Silicon Valley.

Doing a search deal with Bing is the obvious and only alternative, although few expect any agreement to be as rich as the one MySpace did with Google in 2006 for $900 million.

Interestingly, it was recently reported that both Google and Facebook were bolstering music search and sales offerings, and Google's apparently includes the use of the iLike player.

In other words: this could get really complicated.

Execs at both MySpace and Microsoft I reached out to declined to comment.

(Full disclosure: News Corp. owns Dow Jones, which owns AllThingsD, the site where this article originally appeared.)

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

I don't have it confirmed yet, but it appears iLike is preparing to integrate its new music download store into its popular Facebook application sometime soon.

According to one music industry source, Facebook users may be able to start buying downloads from iLike's Facebook app as soon as this week. Seattle-based iLike and its new parent company MySpace aren't wasting anytime testing Facebook.

On Wednesday, MySpace announced that it had aquired iLike for an undisclosed amount of money. The news that the two sides were close to the deal had leaked days ago, so it wasn't a surprise.

But MySpace appears to be positioning itself to either force Facebook to boot iLike's service and risk a public relations backlash, or allow MySpace, its main rival, to profit off of its audience. The situation has to be a little embarrassing for Facebook managers.

The iLike acquisition isn't going to change much, but it is something for MySpace to cheer about. For a long time, Facebook has thrashed Rupert Murdoch's troops in almost every area.

If nothing else, the iLike deal should help morale inside MySpace.

Months ago, iLike began discussing music licensing deals with the four biggest recording companies. Last week, CNET News broke the news that the start-up's download store was opening.

Something I couldn't figure out when I first read that MySpace was trying to acquire iLike was why did iLike CEO Ali Partovi continue to pursue licensing deals in the weeks leading up to the acquisition. He must have known that MySpace Music already possessed rights to sell downloads. What would iLike need with its own agreements?

But the music licenses acquired by MySpace Music would not have covered iLike. Last year, iLike learned the hard way that every service has to cut its own deals with the labels. The start-up tried to acquire access to full-length songs from Rhapsody, the music subscription service. The labels put a quick stop to that.

So it makes sense that Partovi continued to pursue the licensing agreements even after MySpace's acquisition of the company looked inevitable.

What this says is that contrary to what some sources have told me, MySpace is interested in iLike's traffic and music service and not just on some bits of its technology.

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.

Music service iLike is dependent on Facebook for 80 percent of its traffic and revenue, and that fact has suppressed iLike's value, say sources close to the music service.

MySpace has offered about $20 million to acquire iLike, a music recommendation site and provider of Facebook's most popular music application, sources with ties to iLike said. They added that the deal could close at any time. TechCrunch first reported the acquisition talks.

Some in Silicon Valley have speculated that MySpace isn't willing to pay more for iLike because it fears Facebook will boot iLike once its main rival takes control of the service. But that doesn't go far enough in describing the situation, said one of the sources. What has pushed iLike's valuation down is a problem with control. The company's managers have no way to prove to potential acquirers that their business model has a bright future because they can't predict from one day to the next which direction Facebook's Platform will go. The source said that leaders at iLike, or any other company on the platform, are not truly in control of their fate--Facebook's Mark Zuckerberg is.

"The cash flow of any company doing business on Facebook's API, or Facebook Connect, or Facebook platform is inherently at risk," said the source. "The multiple that an investor can place on that cash flow is not that much greater than 1, because you never know at which point Facebook could change the terms of the relationship or change the technology and cut off that cash flow."

There is no question that plenty of other factors may have contributed to iLike's meager sales price, but the questions raised by the music service's predicament may be a warning to companies that have banked on the developer platforms created by Apple, Twitter, and Facebook. It only makes sense that potential buyers of these pilotfish start-ups would demand a price that reflects the risks. After all, what happens if Facebook or Apple decides they want to compete in your sector? Click, off go the lights.

Facebook representatives did not respond to an interview request. Ali Partovi, iLike's CEO, on Tuesday issued a terse statement: "Twitter and the iPhone are the platforms of the future."

At the very least, this apparent snub of Facebook indicates that the once friendly relationship between Facebook and iLike has seen better days. The brothers Partovi, Ali and Hadi--iLike's co-founders--were chummy enough with Zuckerberg, Facebook's CEO, to throw him a party in 2007. The celebration was intended in part to show the Partovis' appreciation.

The brothers had plenty to be grateful for. Out of iLike's then 11 million users, 7 million came from Facebook. Critics of iLike will no doubt point out that the ad-supported music company acquired most of its now 50 million registered users from Facebook. They will also likely note that even with all that traffic, iLike wasn't exactly a cash machine. Ali Partovi told me last week that after running the company, in some form or another, for the past six years, it was cash flow positive for just the past eight months.

The company didn't license full-length songs from the four big record companies, so it didn't have the same large overhead of some of its rivals. But it also wasn't generating much revenue, the source said.

The company also competes in one of the biggest underachieving sectors in digital entertainment. Ad-supported music is still in its earliest stages of development, but the sites that have crawled out of digital music's primordial ooze don't look so good. Some of the pioneers, such as Ruckus and SpiralFrog, are already dead. Others, such as Imeem and Qtrax, have wrestled with financial setbacks. MySpace's own music service has failed to live up to expectations since launching nearly a year ago, according to music industry sources.

And news reports indicate iLike was searching for a buyer as far back as last year. Certainly, all of that could have helped drive down a valuation.

And there's yet another twist: a source close to MySpace said Rupert Murdoch's social-networking site is interested only in iLike's technology and couldn't care less about the music service's traffic. The source said many of iLike's users have downloaded its app but don't use it very much. Mike Arrington at TechCrunch wrote that iLike has built a tool to help users make recommendations and artists publish their work. The technology can be used as well for videos and games.

Murdoch has said that he intends to remake MySpace into more of an entertainment hub. Since MySpace already offers music and video, it might be a good bet that MySpace would dive into gaming.

One thing is for sure: MySpace would not buy iLike to obtain the company's download licenses for MySpace Music. Last week, iLike began testing a download store where it will sell MP3s from all four major labels. But MySpace Music already owned licenses to offer song downloads. For some reason it has yet to offer them, according to music industry sources.

At the same time MySpace tries to get its music house in order, the iLike situation throws the spotlight on Facebook's music aspirations. For a long time the company seemed content with allowing iLike to be the site's de facto music offering.

In March 2008, The Financial Times reported that Facebook was in talks with the largest major labels about launching a music store. Nothing ever came of it.

One can only wonder that if MySpace buys iLike, will that send Facebook back to the negotiating table with the big labels.

News Corp.-owned MySpace is "close to acquiring" social music service iLike, according to TechCrunch.

The price tag is rumored to be in the neighborhood of $20 million. Representatives from iLike were not immediately available for comment.

The report comes within days of iLike launching a music download store--a development first reported by CNET News--with MP3s available from all four major record labels.

The deal, if confirmed as accurate, highlights the often complicated connections in digital media's elite ranks.

iLike, for example, rose to fame through its close ties to Facebook. The iLike application, since re-branded to simply Music, was one of the first big applications to launch on Facebook's platform at its debut. Its ad-supported streaming music service has become one of the most prominent in a packed field--it now has about 50 million users and just launched a suite of iPhone apps. But the streaming music niche has proven difficult to monetize and has left some players in the space reportedly hunting for an exit.

MySpace, meanwhile, has seen stagnant growth as the once-far-smaller Facebook has rapidly overtaken it in the social-networking race, thanks in part to the proliferation of third-party apps like iLike on Facebook's groundbreaking developer platform. As part of an executive restructuring earlier this year, MySpace installed former Facebook chief operating officer Owen Van Natta as its CEO, replacing co-founder Chris DeWolfe.

Attempting to refocus and return to its roots as a hub for music and pop culture, MySpace launched its own streaming music service, called MySpace Music, and hired MTV veteran Courtney Holt to run the division. MySpace Music, a joint venture with the record labels, does not operate its own download store but instead directs users to Amazon MP3 downloads through affiliate links. But MySpace Music hasn't received thoroughly positive reviews from the record labels hoping to profit from it.

Disclosure: CNET News is part of CBS Interactive, which also publishes Last.fm, a competitor to iLike.

Updated at 7:38 a.m. PDT with additional details and background.

iLike CEO Ali Partovi

(Credit: iLike)

Social-networking service iLike opened a music download store on Friday, and has begun selling MP3s from all the major music labels.

On Wednesday, CNET News reported that iLike would soon open a store and offer song downloads from at least three of the major labels. The site actually is selling music from all four big record companies: Universal Music Group, Sony Music Entertainment, Warner Music Group, and EMI.

The prices are comparable with those found at iTunes and Amazon. Songs range in price from 89 cents to $1.29.

Companies competing in the ad-supported music space have struggled to generate cash as advertisers are reluctant to pay them premium rates. Users aren't necessarily looking at a computer screen when listening to music and this makes it hard to market to them. Imeem, which streams music free of charge to users and supports itself through ad sales, is another service that has recently started testing a download store.

In Wednesday's story about the new store, I wrote that iLike would challenge iTunes, which is the overwhelming power in sales of music downloads, and anybody selling downloads should count Apple as a competitor. Ali Partovi, iLike's CEO disagreed and said the company will continue to offer links to iTunes for users who want to continue buying music from Apple.

"We have always linked to iTunes and will continue to do so," Partovi said. "We're not challenging iTunes, but complementing it with a faster, more immediate option that's better tuned for the impulse-buy: by allowing you to purchase in-page without leaving the Web site you were on.

"Our goal is to provide an immediate, in-page music buying experience for music fans," he continued. "Today the service is available to users in the U.S. but we also intend to roll it out across our applications and platforms over time."

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."