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Snocap CEO Rusty Rueff

(Credit: Snocap)

On the morning after laying off 54 percent of his staff, Snocap CEO Rusty Rueff, greeted me in his San Francisco office.

Guarded at first, Rueff slowly began offering details on Friday about why the music-licensing company, cofounded in 2002 by Shawn Fanning of Napster fame, cut its workforce from 57 to 26 employees and put itself up for sale.

Snocap offers to handle copyright and music licensing for musicians and also powers embeddable download stores that artists can place on any site. From these digital-music vending machines, the artists can sell their own music. According to Rueff, there are signs that the idea is starting to take hold.

"Just not as fast as we expected," Rueff said. "You have to understand that it took a lot of work and a lot of capital to bring this capability to market. But it's that time when we are asking ourselves what's next. And we think it's probably best for us to be part of larger entity."

Snocap is one of the scores of companies trying to come up with a new way to sell music. Almost everyone agrees that the old one, which was built around big music labels, is dead. Sure, technology is helping to usher out the traditional music model more than anything else, but technology hasn't provided a replacement either.

Look around. None of the music services other than iTunes have managed to make much of an impact; not Yahoo Music, Lala.com, Rhapsody, Pandora, Social.FM (formerly Mercora), and some of them have been around for years. The reason is that selling music online is expensive and complicated.

Spiralfrog, the ad-supported music site that launched recently spent years trying to negotiate licensing deals with the four top music labels but for all of its effort has only managed to sign one, Universal Music Group. Figuring out the technology can be tough as well.

Last summer, Lala.com tried to offer a streaming service that enabled users to listen to entire albums free of charge. But it was abruptly taken offline only a month later after it was unable to handle the demand, according to the company.

"When you're trying to be a pioneer, you have to remember that pioneers take arrows," said Rueff, who spent seven years as an executive at Electronic Arts before taking the job at Snocap.

Rueff said that the layoffs were designed to help make the company more attractive to a buyer. A Snocap spokeswoman has said that executives have received offers but declined to give details.

The company's deal to provide music stores for MySpace customers remains intact.

Snocap's leadership, from left to right: Ali Aydar, chief operating officer; co-founders Jordan Mendelson and Shawn Fanning.

(Credit: Snocap)

UPDATE (12:15 p.m. PDT Friday): CNET News.com interviewed Snocap CEO Rusty Rueff after this story was published. He says the company's music stores just weren't catching on fast enough and its time to sell the company. You can read what he has to say in this story.

Snocap, the music-licensing company best known for being the follow-up act of Napster founder Shawn Fanning, has cut its staff by 60 percent, a spokeswoman for the company said Thursday evening.

Founded in 2002 by Fanning, Jordan Mendelson, and Ron Conway, Snocap started out trying to provide digital-music licensing, but has moved into new areas, such as setting up online stores for musicians.

Thanks in large part to Fanning's Napster fame, the San Francisco-based company attracted a lot of attention when it launched, but has seen its profile steadily diminish in recent years.

The blog Valleywag, which first reported the story, also said the company is for sale.

"Snocap has received interest from several companies and is pursuing that," said Susan Celia Swan, a company representative.

The idea behind Snocap was to help sell music legally online. The company handled the licensing and copyright issues and anybody wishing to sell music from a Web site need only have Snocap set them up with a digital music store that can be embedded into any site.

The service allows artists to sell music directly to consumers and even set their own prices.

But many industry insiders were skeptical about Snocap's chances from the start. Fanning, who founded pioneering file-sharing service Napster, was public enemy No.1 in the sector for years. Skeptics questioned whether music executives would do business with him.

This time Fanning was holding a white flag, however. He declared that Snocap was all about empowering artists and the legal sale of music.

In September 2006, Snocap announced a deal to sell music on MySpace.com. The service allowed bands of any size to sell music for whatever price they wanted. Snocap and MySpace would share the small fee that they charged. It was MySpace's first official e-commerce venture.

Snocap said that its MyStores have attracted more than 175,000 registered consumers, and over 80,000 artists have created their own storefronts.

The number of registered consumers seems shockingly low when one considers that MySpace is supposed to have over 100 million registered users. I know that there are far less active monthly users on MySpace but even if there are 10 million, one would think that Snocap should have a larger profile.

In September, MyStores received nearly 20 million unique visitors and more than 140 million monthly impressions. What's important here is that this is an e-commerce play but the company doesn't reveal anything about sales.

Online community Imeem launched in August 2005, and although I wasn't familiar with the service at the time, it sounds like a blend of several popular features: social networking, instant messaging, blogging and photo sharing. At some point, the company added a feature that would let users create playlists from their personal music collections, then stream these playlists to other users. By spring 2007, the service claimed 16 million active users.

The concept was a bit like MySpace.com, and like that site, Imeem eventually drew a copyright infringement lawsuit from a major record label--Warner Music Group, in this case.

Imeem quickly responded by licensing more than 3 million tracks from various independent labels and publishers, and signing a deal with Snocap to help run a new ad-funded service.

Created by original Napster founder Shawn Fanning, Snocap provides a technology platform to track usage of particular songs so that the owners of those songs can be fairly compensated. It's a nuts-and-bolts kind of business, which is a good place to be in the music industry today: nobody knows exactly how the next-generation music business is going to look, but most agree that it'll involve digital files being exchanged over some kind of network, and somebody needs to track all those exchanges if there's going to be any music industry, rather than a billion independent artists all trying to chase their own narrow slice of action.

A couple of days ago, Warner agreed to drop its lawsuit against Imeem and offer its catalog in exchange for a cut of advertising revenues.

Could this be the model that finally causes legal content-sharing sites to take off? It's not enough for the record industry to build yet another file-sharing network, then wait for customers to show up.

To compete with the "darknet," new services have to offer something singularly interesting, such as ease of use, attractive social-networking features, or integration with existing products and services (which seems to be an approach that's working for iLike). If that's the case, these services will build an userbase until they finally cross the threshold where one or more major content owners recognize them, at which point they'll have to take the necessary steps to get legal. Sort of a completion-backward principle for online music.