Is MySpace Buying Imeem?

Imeem's expected fire sale to MySpace shows that the plight of ad-supported streaming music services is worsening. News Corp.'s (NWS) social networking site MySpace is close to clinching an agreement to purchase Imeem, an online music business started in 2003, a person familiar with the matter says. MySpace would pay about $1 million in cash and as much as $9 million to employees, the person says. That would amount to an abysmal return on a company that raised $24.8 million in funding, and it bodes ill for other ad-supported online music services once considered a ray of hope for the hobbled music industry. More than a dozen startups are struggling to make a profit using a formula similar to Imeem's. The service, which lets users play virtually any song over the Web at any time for no charge, pays record labels small fees for each play. As it grew in popularity and reached millions of Web users, Imeem was unable to generate sufficient ad revenue to offset the resulting higher royalty fees. Technology blog TechCrunch first reported that MySpace was in talks to acquire Imeem on Nov. 16. Spotify, a U.K.-based music startup that also lets surfers access free music and relies mainly on revenues from advertising, recently said it would delay its entrance into the U.S. market because it couldn't reach favorable deals with record labels. MySpace Music, the social network's own ad-supported free streaming service, has deals in place with the four major labels for free streaming. Yet MySpace Music has made recent cutbacks, such as no longer automatically playing songs each time a user visits a profile page, that leave outsiders suspecting it, too, is having a hard time wringing profit from ad revenue. Blaming the Record LabelsNeil Smith, vice-president for business management at Rhapsody, an online music service owned by Real Networks (RNWK), lays blame on the record labels. "The music industry is trying to charge way too much for their content," Smith says. "That is creating an environment where it is not possible to have sustainable businesses." Representatives of major labels didn't immediately respond to requests for comment. Unlike Imeem and MySpace Music, Rhapsody charges most of its 700,000 users $14 to $15 a month to stream any song they want online. Similar subscription service eMusic has around 400,000 subscribers. That's a fraction of the number of users of the popular free services. Imeem, for instance, recently reported more than 4.5 million users, according to comScore (SCOR). Rhapsody, too, has had a hard time generating enough revenue from subscriptions to make up for rising royalty expenses. "There hasn't been enough traction in the paid subscription model," Smith admits. As a result of the travails facing online music services, buyers may be scarce, and investors are less likely to fund startups. "It's not an ecosystem that creates a lot of value; it's an ecosystem where a lot of value gets destroyed," says David Pakman, a partner at Palo Alto (Calif.) venture capital firm Venrock. Pakman says he has been approached by new music startups in the past year but has turned all of them away. At least one business is building a relatively successful model in free streaming music on the Web. Pandora, founded in 2000 by Tim Westergren, expects to turn its first profit by the end of this year by selling ads on its online radio service. The key difference between Pandora and companies like Imeem has been setting limits on what users can hear; listeners can't simply pick any song. That brings the cost of licenses down, says Westergren. "There's no secret that it's a real challenge to support on-demand services with just advertising," Westergren says. Even as valuations drop and investors steer clear, innovation in online music isn't dead. Consider Rdio, a secretive service yet to be launched by Skype founders Niklas Zennström and Janus Friis. Rdio will try to make money through subscriptions that let users share playlists with their friends on the Web and on their mobile phones.

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