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SpiralFrog continues to dodge bullets.

The troubled ad-supported music service that has needed loans to keep operating was supposed to pay creditors $7 million by April 19. At least from the outside the situation looked bad because it was only three months ago that SpiralFrog needed a $2 million loan. Where would a start-up that's only been in business for six months get that kind of money?

Turns out, SpiralFrog's managers renegotiated the loan terms and the company now has a year to repay, according to a company spokeswoman.

So SpiralFrog keeps hopping, but for how much longer?

At the end of the month, privately held SpiralFrog is due to report year-end earnings for 2007 (the company reports like a public company as part of an agreement with investors). That report could hold important clues about the company's prospects.

Early indications are that SpiralFrog, which attracted lots of media attention two years ago when it announced plans to offer free legal music, has met with mixed results.

The good news is the New York-based company topped 1 million unique visitors in January and music-industry sources say it has made several hires in recent weeks.

But the service still wrestles with the same problem it has tried to remedy for two years: a highly limited song selection.

Once trumpeted as a potential iTunes killer, SpiralFrog's music library is dwarfed by iTunes. After two years of trying to sell the four largest music companies on its business model, SpiralFrog executives have managed to sign one: Universal Music Group. It's extremely hard for a music service to compete against Apple's music store, but it's nearly inconceivable to do it without songs from all top four labels.

Meanwhile, social networks, such as Imeem and Last.fm, which stream music to users' PCs, can boast licensing deals with the majors. And MySpace and Facebook are also in talks with the labels about offering music.

Numerous sources close the record labels said SpiralFrog's problem mostly comes down to its business model. Sony BMG Music Entertainment and Warner Music Group don't have much faith, the sources said. EMI Music Group's publishing unit already has an agreement with the service and the label could eventually sign, according to one source.

Another deal breaker for the labels has been the turmoil at the company. An executive shuffle in Dec. 2006 and SpiralFrog's money troubles has given the big music firms pause, said the sources.

Those financial worries may continue to undermine the company.

SpiralFrog needed to pay Universal Music $3.3 million before it ever sold a single song. Even if managers convince another major to sign on, where are they going to get the money to pay the fees?

In the third quarter, SpiralFrog burned through $3.4 million while reporting revenue of $20,400. But the free-music service, which launched in September, had only been open for a three weeks during that period. Starting with the fourth-quarter report, we're going to start seeing how scrappy SpiralFrog really is.

Hey, Mr. Music Executive: scrap your preoccupation with CD sales and start looking for ways to help people share, yes share music; focus more on developing and profiting from artists; and forget about subscription services and ad-supported music.

These are the conclusions of James McQuivey, a Forrester analyst, according to a report titled "The End Of The Music Industry As We Know It," issued on Tuesday.

That's a fitting title because the report reads like an obituary. Tower Records, a music mecca for decades, has already closed but McQuivey argues the real deathblow to the industry will come when Wal-Mart Stores, Best Buy, and other large retailers begin scaling back shelf space for CDs.

"This move will permanently signal the end of the music business as it was once known," McQuivey wrote. "From that point on, more music will be sold digitally than on CD, reducing CD sales to just $3.8 billion in 2012."

McQuivey, a former professor at Boston University, tells record executives to cheer up because there are ways to rise from the ashes. He says first, the industry should quit fooling around with music subscriptions and ad-supported models. People want to own their music and downloads have won. Only 7 percent of adults on the Web say they have ever tried a subscription service, according to the report.

The analyst also sent a message to ad-supported music services, such as SpiralFrog and Qtrax. The ad-supported model should stay "on the radio where it belongs," he said in his report. Social networks are better places for selling ads against music, and they also allow users to share songs virally.

McQuivey's finding here was particularly timely. Over the weekend, PaidContent reported that MySpace is in talks with the four top labels about launching a jointly operated, ad-supported music service.

Sharing is vital, according to McQuivey, because it makes new music discovery easier, which the Web was supposed to help with but so far has tanked. In this effort, he sends a special shout out to Slacker, a personal online-radio service.

"The gold medal for 2007 (in music discovery) should have gone to Slacker," McQuivey wrote. "(The) portable device provides instant access to radio-formatted music that can easily convert to a digital download with the click of a button. This model combines the simplicity of the radio experience with the power of music ownership."

When it comes to artists, the labels should focus more broadly on a musician's career, including merchandise and concerts, as well as recordings. He said it's the artists, not the CDs that are the music industry's true product.

In a final note, McQuivey suggests that music artists, who have historically looked down their noses at advertising, had better change. He says the industry should rip a page out of NASCAR's playbook.

"Artists who used to pretend that their platinum album success was really about their "art" will no longer have that luxurious pretense because labels won't sign them unless they agree to a barrage of sponsorship opportunities," McQuivey wrote. "There will eventually come a day when Chips Ahoy will contend with the Keebler Elves over who can be the official cookie of the Taylor Swift world tour."

The music industry continues to take baby steps toward ad-supported music as EMI has become the third major record label to license songs to social-networking site Imeem.

The companies said on Monday that Imeem users will be allowed to upload EMI-produced songs to the site. The ad-supported service is free to users and Imeem plans to share ad revenue with the labels. Sony BMG and Warner Music Group previously cut similar deals with Imeem. Users can post the music to their personal pages and share the music with friends, but the offering only allows them to stream music and doesn't include downloads.

Some might be misled into believing that Imeem would appear to be outpacing SpiralFrog, a company that attracted much fanfare and scrutiny a year ago for ballyhooing an ad-supported music service. New York-based SpiralFrog has emerged as the standard bearer for ad-supported music but has managed to sign only one major label to a licensing deal: Universal Music Group.

The difference between Imeem and SpiralFrog comes down to streaming. SpiralFrog offers free downloads as long as customers are willing to sit through some ads. One of the sticking points that some record executives have about SpiralFrog is that they hesitate to attach the word "free" around their music. With millions obtaining songs for free from illegal file sharing, music-industry honchos don't want to perpetuate the perception that songs are valueless.

Imeem, headquartered in San Francisco, is different in that it offers music but not to own. The service is meant to help people discover songs, and Imeem has supplied links to iTunes and Amazon in case users wish to buy a song.

Who knows, should Imeem's music offering succeed, perhaps that will help record executives grow more comfortable with ad-supported downloads.

Free-music site SpiralFrog made its long-awaited debut on Sunday evening, defying critics who said the struggling company would never get off the ground.

The ad-supported music store opened with more than 770,000 songs and 3,500 music videos from numerous independent labels and Universal Music Group, the largest of the top four record companies.

When the company announced plans in August 2006 to offer ad-supported music free of charge to users media pundits called it an iTunes killer. But in December, New York-based SpiralFrog suffered an executive shakeup, burned through most of its cash and has since acknowledged selling secured notes, which are essentially loans, to fund operations.

The company is banking on revenues generated from ad sales to help cure its financial ills, said founder Joe Mohen. The idea behind the company was to offer a legal alternative to illegal file sharing.

But can SpiralFrog overcome a handicapped music offering?

SpiralFrog's music library was expected by critics to be hamstrung by a relatively small music library. A quick run through of the site on Sunday showed that SpiralFrog offered eight of the top 10 best-selling songs of the week, according to Billboard.

Universal owns 25 percent of the global music market, so SpiralFrog is not without some firepower behind it.

Songs can be downloaded to any portable device that is compatible with Windows digital rights management. Each user is allowed to transfer their music to two different devices.

Users must renew their monthly memberships every 30 days to continue hearing SpiralFrog's music files, which is typical for subscriber services like Yahoo or Napster.

SpiralFrog is a proposed online service that would let users download songs for free in exchange for viewing some sort of advertising. It got some press coverage last August when it announced an agreement to license the music catalog of Universal Music Group, the largest of the four major labels. Over the next few months, however, a missed launch date and executive shake-up led many to write it off as dead.

But the company survived, and now its founder, Joe Mohen, is heralding the beginning of a closed beta test in the United States, with wide release expected by the end of the year.

It seems as if Mohen has a good grasp on the realities of the online-music business, naming pirated music from file-trading networks as SpiralFrog's main competitor, rather than paid downloads from iTunes and the like. But based on this review of the beta from a Canadian publication (the beta launched there in May), there seems to be a crippling lack of portability.

You can't transfer songs from the service to an iPod/iPhone or to a Zune. Wired's preview from last summer explains that the service is part of Microsoft's PlaysForSure logo program, meaning that it uses a version of Windows Media DRM (digital rights management) that's not compatible with Zune. (And Apple's portable devices can't play Windows Media Audio files at all, protected or not.) Nor can you burn the tracks to CD or DVD.

Instead, you're limited to playing tracks on your computer, or on one of the non-Microsoft players that supports PlaysForSure. These players make up less than 20 percent of the market, and this share could fall further, if Microsoft releases an inexpensive flash memory Zune model in time for this holiday season (which is widely expected but hasn't yet been confirmed.)

The only benefit of compressed digital audio is portability--nobody's listening to MP3s for their sound quality. Cutting out more than 80 percent of the portable market seems like a recipe for defeat. Not to mention that only two of the majors have signed on--Universal and Sony/BMG, with EMI and Warner so far staying away. This means that SpiralFrog is launching with 700,000 songs, compared with more than 5 million for iTunes, and at least 2 million for the Zune Marketplace and most other services.

One tantalizing possibility: SpiralFrog could team up with a cell phone maker and wireless carrier to create a competitor to the iPhone. Offering free over-the-air downloads could help it compete against iPhone's computer-tethered paid-download model, and this distribution method would probably be more amenable to the content owners--it's hard to strip the DRM from a song that's stuck on a device, but much easier if that file has to pass through a computer first.

I've signed up for the beta, and if they let me in, I'll test it on a PlaysForSure player and share how it stacks up.