Why imeem Really Sold Out

akv.jpgThis 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.

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