Why imeem Really Sold Out

akv.jpg This morning news broke that MySpace, the second-largest social network that’s currently reinventing itself
as a music destination, was buying imeem, a free online music service
that has been remixed (and remade) more times that ’90s dance anthem
“Keep on Moving.” TechCrunch, which reported
on the news, didn’t reveal what the deal terms were. I have been
dialing sources for information, and have found an interesting
backstory behind this sale.

First, it was essentially a fire sale. Imeem, which in the past has been threatened into submission by large music labels, was feeling the heat from second-tier music labels wanting to get their pieces of
flesh. On Oct. 21, The Orchard Enterprises, one of
the largest independent record labels, sued imeem in U.S. District
Court, Southern District of New York. According to the suit, imeem had
to pay $150,000 per infringement. On those terms, for multiple
infringements, the total could have run into billions of dollars.

Remember the billion-dollar lawsuit filed by Viacom against YouTube? Imeem, I’m pretty sure, knows how painful it is to fight the record labels in the courts. The company fought Warner Brothers, but had to
eventually settle by giving up equity in the company. A long, bruising
battle is something imeem couldn’t quite afford since it was running
low on cash. And it couldn’t pay these guys off. By selling to MySpace,
which already has arrangements with The Orchard Enterprises, some of
these legal threats might go away. Interestingly, with this deal,
record labels that owned a nice chunk of imeem could see their equity
in MySpace Music go up as well.

At the same time, founder & CEO Dalton Caldwell hadn’t been able to rustle up more cash. I bet the investors who have pumped in more than $35 million (including $10 million in debt) got
tired of putting more cash into what seems like a bottomless pit. Back in September, news emerged that Sequoia Capital, one of the long-time backers of imeem, opted out of funding the company. Back in May, Warner Brothers wrote off a $16 million charge, but gave imeem new money and forgave future royalty payments in exchange for more equity. Fat lot of good that did them.

I have been fairly skeptical if imeem and their ilk, mostly because I felt that they cut bad deals and had painted themselves into a corner. Frankly, I
am not that hot on MySpace Music, either. MySpace earlier bought iLike, another free music service, for $10 million — a firesale price
mostly to get hold of the talent. The bargain basement sales of iLike
and imeem once again shows that the online music industry remains as
risky as walking through a minefield punch-drunk.

Well, I guess when the company had a choice between locking the doors or teaming up with MySpace, it wasn’t a hard decision to make.