Imeem Buyout Could Push MySpace Closer to “Freemium”

Consolidation appears imminent in the free streaming music sector, as MySpace is on the verge of acquiring social music site Imeem. A source with knowledge of the situation confirmed that negotiations are in process, but no deal is set. If it happens, the buy would be MySpace’s second fire-sale acquisition this year, following its mid-summer deal for iLike at a bargain-basement price. Imeem’s valuation, once reportedly above $200 million, was said to have fallen below $10 million at the time of a recapitalization round earlier this year.
The proposed deal would unite two companies that share the same problem: Rights holders demand royalties for song streams at rates higher than advertising alone can offset. Imeem has been a money drain to its stakeholders, but it does have several assets that could prove valuable to MySpace, which may be mulling a move toward a “freemium” model. Its sales, engineering and leadership teams hold significant value. Imeem acquired Snocap, the music-selling widget provider founded by Napster creator Shawn Fanning and seen on many MySpace artist pages, in early 2008, and launched an iPhone app in May 2009.
Although no company has reached profitability providing free ad-supported music streams, Imeem was optimistic about reaching that point next year. The company had renegotiated its royalty rates with at least some of the major labels, reduced its headcount and other expenses, and accepted a round of funding worth about $6 million in spring 2009. But key investor Sequoia Capital bailed out of the recap round, and was largely washed out along with other stakeholders.
What’s more, its brand name is known as a music destination, in contrast with MySpace’s reputation as a broader social network. Imeem is also said to be developing a new user interface, the better to compete with Spotify, and if MySpace is planning to launch a paid service, it could incorporate parts of Imeem’s existing but little-used VIP service. Imeem has put those pieces in place already; for MySpace it’s a chance to buy rather than build them.
Imeem began exploring a sale more than a year ago, retaining Montgomery & Co. to evaluate strategic options, but no buyer emerged. Since that time, the free streaming model has fallen on hard times, and may soon be a thing of the past. If the current deal produces an exit disappointing to Imeem’s stakeholders, at least it will have produced something better than bankruptcy — which would be a small victory.