Is Warner Music Killing Music Startups?

[qi:005] Earlier today, news emerged that Warner Music Group had taken a $33 million writedown on its investments in startups Lala ($20 million) and Imeem ($15 million). What that means is that Warner music is giving up on these ad-supported digital music startups and moving on. This comes as no surprise to us: Rags Gupta had pointed out in a post for us that music startups are destined to fail because the labels are gouging them silly. At a royalty rate that is $10 per 1,000 plays, there is little chance any of these startups making money. As Rags pointed out, “While Imeem has licenses from several labels it’s been reported that it gave up a significant piece of the company and agreed to onerous terms, so, needless to say, it likely isn’t profitable on its licensed music, either.”

Imeem is in deep trouble. The company raised an emergency round of money from its existing investors so it can keep the servers running and cut salary checks. Apparently labels are also dissatisfied with MySpace Music and the money it’s generating. Again, not such a surprise for our readers. As startups such as Imeem stare down the abyss, it’s the record labels that will ultimately pay the price. Today’s music consumers have come to expect services such as Imeem as a way to discover music. By asphyxiating these discovery engines, record labels are running the risk of annoying consumers and forcing them to look elsewhere. At least this time around the music industry can’t blame their customers for their problems — they are, after all, the gang that can’t find its way out of a paper bag.