How Warner Music Killed Facebook Music

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Facebook’s ongoing effort to launch a free streaming music service is stalled, according to multiple sources familiar with the situation. The company was close to a deal that would bring free streaming music from three of the four big labels (Universal, Sony, EMI) through the Total Music joint venture. But the deal stalled when the lone holdout, Warner Music, refused to participate.

Through most of 2008 Facebook said on and off record that they had no real interest in their own music service and that third parties like iLike could continue to build their Facebook music applications without fear of competition directly from Facebook.

News leaked in the Fall, though, that Facebook had approached a number of third parties to power the official Facebook music application:

We believe, based on discussions with a number of sources, that Buzznet, iLike, iMeem, LaLa, Last.fm, Rhapsody and other services were contacted and provided with a document (sometimes referred to by sources as a RFP (request for proposal), other times called a term sheet) that outlined certain goals of the new Facebook music service.

The RFP requires the third party service to build and power a new Facebook Music Service that offers free music streaming and playlists, music downloads for a fee, and other music merchandising services such as ringtones, concert ticket sales and physical goods like tshirts (if this sounds like MySpace Music, it’s because it is exactly their model). The service must not only handle front end user requirements but must also be able to handle the very tricky tracking issues required by the labels to monitor music streams and fees.

The RFP also includes onerous termination provisions that allow Facebook to take ownership and control of the service and the user data under certain circumstances. In return, say our sources, Facebook will offer the third party a split on revenues generated from the service.

We’ve heard conflicting accounts of who will pay for the big up front fees labels require to get a music service up and running. Some estimates of prepaid royalty requirements are as high as $100 million, which Facebook is looking to avoid paying themselves. Other sources say that Facebook may be willing to pay these fees if they can’t force the third party to take them on.

Many people, us included, saw this as a new effort by Facebook to tackle the music opportunity. But our sources say it was actually near the end of a year-long effort by Facebook to launch their own free streaming music service in partnership with Total Music. Only when those discussion faltered did Facebook reach out to other third parties.

Total Music And Facebook

Total Music, a joint venture by Universal and Sony BMG, has had Facebook target from the beginning. The labels approach the Internet from two directions. The first is the command and conquer approach, which is how imeem, MySpace and others were neutered. Sue the hell out of whoever dares to host music online, then cut a deal with them that brings in millions of dollars in penalties and fees.

The second approach is what Total Music is all about. The service, which acquired Ruckus to handle the back end, is striving to cut two types of deals. The first is with device makers to allow music to be accessed directly from the device for free. The device makers pay a fee to Total Music, which is passed on to the consumer. The second type of deal is with websites – who get to stream music for free with advertising. The revenue from those ads, plus a lot of user data, is owned by Total Music.

That’s the deal that Total Music approached Facebook with. Facebook would get free streaming music (while rival MySpace paid a fee per song played). Total Music would serve advertising and keep all the revenue. Facebook would also hand over user data to allow Total Music to port playlists to supported devices and other services.

The deal never happened and looks like it never will. Some sources say it was because Facebook didn’t want to hand over all the revenue and user data, and so they reached out to third parties to get a better deal. But others have a different explanation which makes more sense. Warner Music refused to allow their music to be accessed for free.

Warner, a big shareholder in LaLa (a service we’ve raved about) – they took most of the company’s recent $20 million venture round. They’ve been pushing LaLa heavily to Facebook.

But LaLa’s model requires users to pay to stream music, a non-starter for Facebook and any serious rival to MySpace.

That leaves Facebook in a tough spot. Venture dollars to fund a big new streaming music service have dried up, so its unlikely that any third party will be able to pay the tens of millions of dollars it will require to get a MySpace Music-like deal done. The Total Music deal is being blocked by Warner. And LaLa’s business model just doesn’t work with what Facebook wants to do (free).

That means Facebook either needs to pay, or Warner needs to budge. Neither may happen, and rumor is that Total Music’s political capital at Universal and Sony has all but dried up as they struggle to complete the Facebook or any other deal.

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